If You Come Into a Windfall, Avoid These 5 Disastrous Financial Mistakes

Pretty much anyone who has ever struggled financially has dreamt of coming into a windfall. You know, like maybe a 100-year-old distant relative you’ve never met dies and leaves you their fortune. Or maybe you win the lottery. Though not necessarily common, windfalls do occur, and if and when they do, it’s important to have a solid plan .

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Unfortunately, many of those who land a major amount of money at once do not make wise decisions. In fact, it’s been reported that 70% of people who come into sudden money are broke within a few years. And, with many boomers set to pass on fortunes to their millennial kids or Gen Z grandchildren soon — in what is being dubbed the “ Great Wealth Transfer ” — it’s important for these generations to be aware of the common pitfalls.

If you come into a windfall, experts advise you to avoid these five disastrous financial mistakes .

Money mistakes the super wealthy never make - that you might be doing now.

Spending Too Much Too Fast

One very common mistake that people who come into windfalls make is spending too much money right away. It’s an easy trap to fall into, especially if you’ve been barely scraping by and haven’t splurged in ages, if ever.

“Even though your financial windfall may seem like a lot now, if you spend it too quickly it won’t feel that way down the road,” said Michael Corgiat, SVP, financial advisor at Wealth Enhancement Group . “You can celebrate, but don’t overdo it. Think carefully about how long you want your windfall to last, create a plan and a budget, and stick to it.”

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Oversharing (Your News and Your Money)

Landing a financial windfall is one of the most exciting things that can happen to you. Naturally, you want to share this fantastic news with family and friends — but it’s a mistake to tell too many people.

“Keep it quiet,” Corgiat said. “Family and friends will come out of the woodwork with their hands out. This doesn’t mean you can’t help, just think about what help they need before giving away large amounts indiscriminately.”

Overlooking Potential Tax Obligations

The saying, “there’s no such thing as free money,” is apt to use here. Your windfall could involve tax obligations. “What sort of a windfall is it?” Corgiat said. “Some have significant tax ramifications.”

For example, a windfall from stock options can create a “tax nightmare,” according to R Persichitte, CPA, CFP, CFE, affiliate professor at Metropolitan State University of Denver . “Due to some unlucky timing, one client owed more taxes than the cash he received from his options. He turned his big windfall into an unexpected bill to pay.”

Other windfall events like inheriting a retirement account, winning a lottery or benefiting from a legal settlement can all land you in new and challenging tax situations. And often you’ll have to pay these taxes pronto.

“Most of the time, with a big windfall, you’ll have to pay estimated taxes close to when you receive it,” Persichitte said. “If you forget, there’s a penalty when you file.”

Tax rules are more complex once the numbers grow, so with a big windfall, you need to be more proactive and have a strategy before you even get the money.

Buying Wildly Expensive Things

You may get so much money that you feel you can finally afford your dream car, your dream house, and essentially your dream lifestyle. Still, Corgiat said to avoid buying big-ticket items like a Corvette or a powerboat. Wait until you’ve worked out a safe financial plan before you splurge on something substantial.

Neglecting To Continue To Save Money and Manage Debt

Absolutely you will want to use your financial windfall to pay off any existing “bad” debts, such as credit card debt, but don’t just do this once. And don’t get out of debt only to land in more debt later.

You should also make sure to keep your emergency fund fully stocked at all times.

This article originally appeared on GOBankingRates.com : If You Come Into a Windfall, Avoid These 5 Disastrous Financial Mistakes