It could happen to you.
A surprise inheritance, a lawsuit settlement, a lottery prize or perhaps a buyout from your employer could mean you suddenly find yourself with extra cash. Chances are, it won't be a $300 million Powerball jackpot. But even a far smaller windfall can help provide financial security if you handle it wisely.
The key is to think first, spend later.
Before you buy a round for everyone at the pub or spread the word on your Facebook page, financial advisers say you should quietly assess your current situation. Taking stock of your shortand long-term goals, debts and other personal circumstances will help you decide the best way to use the money. Plus, keeping the news to yourself will give you time to make decisions before relatives, friends, charities or questionable investment schemes can try to stake claims on your emotions.
Correct past mistakes
If you receive a fairly modest amount, say $10,000 to $50,000, a good use may be to repair some potential problems.
For instance when examining your debt load, you should certainly focus on any high-interest balances.
The average household carries more than $8,000 in credit card debt and the average interest rate is up to about 13.5 percent. Making only minimum payments and adding no more charges, it would take nearly 10 years to pay that balance, costing an additional $3,000 in interest.
Using your windfall to pay down that debt would not only remove the burden of monthly payments, but save more in interest than you could expect to make by investing the same amount in the stock market. The vast majority of the time, paying down debt is going to be "at the top of my list," said Ronald Myers, a planner with Associated Investor Services in Fort Lauderdale, Fla.
In the same way, removing other financial obligations that cause stress or cost a lot could help dramatically improve your financial situation. This will allow you to use future earnings to reach your goals.
Typically, advisers say people who come into modest amounts don't seek financial advice. Even those who receive more substantial sums, like $100,000 to $500,000, often don't seek help, which may be a mistake. Without some guidance, the temptation may be to spend that money in ways that could cause problems or disappointments later on.
"The tendency is to acquire things that you've never had before," said Austin Frye, president of the Frye Financial Center in Aventura, Fla. But buying a big new house or a luxury car could mean you won't have enough left to reach other goals.
"Let's see if buying that BMW is going to have a negative effect on your goal of retiring at age 55," Frye said, noting that he has nothing against buying a BMW, just so long as you're aware of the consequences.
Another factor to consider with such purchases is ongoing costs. You need to make sure you'll have enough cash left to fuel the car or pay the upkeep on the vacation cottage.
One big issue, especially if you find yourself with $1 million or more, will be whether to quit your job. It may be tempting, but the sum you receive may not be enough to support your lifestyle, even if it seems like a lot of money.
In general, advisers say you can spend about 4 to 4 1/2 percent of your principal if you want your money to last. That's just $40,000 to $45,000 a year from a $1 million pot. That's not a lot to retire on.
"People that work paycheck to paycheck all their lives don't really have an appreciation for what money can and cannot do," said Joe Birkofer, a principal with Legacy Asset Management in Houston. That's why there are stories about the "lottery curse," wherein people who win jackpots find themselves in financial distress or bankruptcy a few years later.
Lottery winners may be learning from those tales. The latest big winner in New York, who has not yet been identified, took a few days to consult with an attorney before submitting the claim, said Jennifer Givner, a spokeswoman for New York Lottery. Aubrey Boyce, a New York Transit worker who won $133 million in July, did the same thing.
"I think that is an emerging trend that we see a lot more often for large jackpot winners," Givner said. "They're getting their financial house in order, getting legal advice and financial advice before coming in."
One increasingly common move is to set up a trust to receive the funds from the lottery, Givner said. Advisers say that's smart, no matter what the source of the windfall, because it limits access to the money, protecting it from rash decisions. That can be especially important if it's a big amount that is well publicized and you are worried about fending off requests for help from family and friends.
Birkofer suggested one way to start planning is to use a simple pie chart. Slicing a circle into pieces and designating them for various goals can help you decide what portion of your newfound money should go to savings and investments, helping family members, giving to charity and for a splurge. "If you eat a whole pie, you generally feel pretty bad," he remarked.
Don't forget the tax man
One slice of that pie you don't want to forget is taxes.
"It's not very romantic, and it's certainly not extremely satisfying, but the government knows about the money," said Birkofer. He pointed to high-profile cases like that of Richard Hatch, the first winner of the reality TV show "Survivor," who was convicted in 2006 of failing to pay taxes on his $1 million prize.
While state lotteries typically deduct taxes from payouts and taxes on an inheritance are usually paid by the estate, Birkofer said it's important to make sure. "In most cases, Uncle Sam is there and he does want to get paid."
Finally, no matter how much money you receive, plan to spend at least a bit of it on something fun.
"You want to be able to do something nice. It's a more well-rounded or balanced approach to having this money," said Marc Henn, president of Harvest Financial Advisors in Cincinnati. If you don't, you might even grow to resent the money you received, he said, suggesting it's not unreasonable to spend about 10 percent.
"Do something nice with that to reward yourself," Henn said. "We can work with the other 90 percent."