Perhaps good news has come your way and you just won the lottery. Maybe it wasn't the big multi-million dollar payoff, but instead a smaller prize that still requires you to maintain employment. Maybe you just received an inheritance from a beloved family member. What should you do now? (Hint: it isn't going on a shopping spree).
The stories of blowing this windfall of winning the lottery or receiving an inheritance are legendary. Everyone has heard of true or imaginary receivers of windfalls that are now dead broke.
I sincerely hope that you win the lottery. I just hope that you are not playing it as an investment but rather as pure entertainment. Playing the lottery is an incredibly bad investment, therefore, please do not take this article as an endorsement of playing the lottery to get rich. It should be purely done as a method of entertainment and NOT the way to prepare for retirement.
But perhaps you received a ticket as part of a Christmas gift and won $40,000. Maybe your Great Aunt Sally passed away at the age of 104 and left you an inheritance of $25,000. How should you deal with the windfall of "found" money?
Make a donation of a portion of the inheritance
The very first thing you need to do is to give 10% of this inheritance to one or more charities. I don't care which one you prefer, but I have a list if you are looking. Giving away part of this money is imperative. You just received a gift, and you should help to take care of your fellow man by giving to someone that is less fortunate than you. Make this donation within one week of receiving the inheritance - do not wait. You won't miss the money, and if you think of helping others first, you will be unbelievably rewarded in good will.
Make one special purchase with the inheritance
You now need to buy ONE thing that is slightly extravagant just for you and your immediate family. The luxury item should not be more than 20% of the lottery winnings that you just received. If you just received an inheritance, make it something that is permanent in your home so that you will always remember the deceased when walking by the item.
When my wife lost her grandmother, she received many pictures and a cedar chest that is still in our bedroom. She also received a small amount of money that we used to help with the purchase of a dining room table. Now whenever we host a dinner at that table, her grandmother is in our thoughts and is part of that celebration.
My grandfather was a poor farmer in southern Illinois. When he passed away at 93 after years of frugal living, I purchased a grandfather clock that sits in the foyer of our home. Now, every 15 minutes, I am reminded of the things that great man taught me regarding the value of planning and understanding the markets.
You now have 70% of your inheritance
I now give you a choice. I don't know your personal situation so I cannot give definitive advice, but I can give suggestions that fit nearly every financial condition.
1. Do you have short-term debt that has an interest of over 7%?
In this case, use as much of the 70% as you need to pay off that debt. Nothing is a better use of that money than to get rid of that debt. Pay it NOW! Don't wait for your cousin to ask you for a loan. Don't wait for that get-rich-quick scheme from you brother-in-law. PAY OFF YOUR EXPENSIVE DEBT!
2. If you don't have expensive debt, do you have 20% equity in your home?
There are a lot of great things that happen when you have 20% equity in your home. You will probably get relief in some fees from your bank when you go over this magical number. Also, bankers are much more willing to have you refinance for a better rate if you have 20% equity. So use enough of your windfall to achieve this ratio.
3. If you have anything left from the inheritance, it is time to save for your retirement.
The simple fact is that you don't need the money that you just won. This money is a windfall. Don't leave it around where you can spend it. Put it into a special investment account and make your money work for you. If you use the money to buy STUFF then you will eventually not have the STUFF, and you will have no money. This behavior is terrible. You need to invest the money in great companies.
If you don't know how to invest in the stock market, then this site is an excellent resource. I include a Watch List that has my current favorite investments. You can also buy my book, The Confident Investor, and that will guide you through the process of learning how to find great companies and successfully invest in them. You can purchase my book wherever books are sold such as Amazon, Barnes and Noble, and Books A Million. It is available in e-book formats for Nook, Kindle, and iPad.
I hope this helps you deal with winning the lottery or receiving an inheritance. Remember, it took your loved one many years to accumulate the wealth and share it with you. Don't waste the money in 18 months. Honor the person that spent their life accumulating a bit of extra cash and thought enough of you to let you have it when they didn't need it. It was a gift for you, so say "Thank you!" and use it suitably.