In this blog post, we’ll explore how to prioritize your financial goals and make the most of a windfall.
You’ve just come into a significant windfall, and now you find yourself with a variety of financial goals vying for your attention.
As a financial advisor, I understand how a sudden influx of cash can be both exciting and overwhelming. With goals like retirement, paying for your children’s education, or perhaps buying a second home on your mind, it’s essential to create a strategy that maximizes your newfound wealth.
Here’s how to prioritize your financial goals after coming into a windfall:
#1: Assess Your Current Financial Situation
The first step in prioritizing your financial goals is to take a comprehensive look at your current financial situation.
Create a detailed inventory of your assets, liabilities, income, and expenses. This will provide a clear picture of your net worth, cash flow, and overall financial health.
With this information, you can determine which goals are most urgent and allocate your windfall accordingly.
#2: Establish or Boost Your Emergency Fund
Before allocating your windfall to any specific goals, it’s crucial to establish or boost an emergency fund.
In general, this fund should cover three to six months of living expenses and serve as a financial safety net in case of unexpected expenses or loss of income. However, you may need more depending on the nature of your employment, lifestyle, and financial obligations.
Having a solid emergency fund in place will give you peace of mind and help keep you on track towards your financial goals if you experience a setback. And with interest rates on the rise, there are a variety of opportunities to earn money on your cash savings right now.
#3: Pay Off High-Interest Debt
If you’re carrying high-interest debt such as credit card balances or personal loans, it’s wise to pay off these debts next. High-interest credit card debt can cost you greatly if you carry a large balance month to month.
For example, WalletHub reports that the average credit card interest rate is currently 21.92% for new offers and 19.07% for existing accounts. If you only make your minimum payment each month, you can extend your payoff date by years due to interest accumulation.
Thus, most financial experts recommend paying off high-interest debt first if you’re prioritizing financial goals after a windfall. In most cases, the cost of bad debt far outweighs the benefits of putting your money to work elsewhere.
#4: Max Out Retirement & Other Tax-Advantaged Saving Accounts
Next, focus on maxing out your contributions to tax-advantaged retirement and health savings accounts, if available.
Many employers incentivize their employees to save for retirement by matching their retirement plan contributions. For example, they may offer a partial match or dollar-for-dollar match up to a certain percentage of your salary.
Essentially, an employer match is “free money.” This can be very valuable in the long run and help you reach your financial goals faster thanks to the power of compounding.
If your employer matches your contributions to a 401(k) plan or other employer-sponsored retirement plan, find out what the terms are. At a minimum, you’ll want to contribute enough to receive as much of the match as possible.
In addition, be sure to check the contribution limits on your employer-sponsored or self-employed retirement plans. In 2023, you can contribute up to $22,500 to a 401(k) plan ($30,000 if you’re aged 50 or above) and $6,500 to an individual retirement account ($7,500 for those 50 and above).
Lastly, individuals with qualifying high deductible health plans are eligible to contribute to a health savings account (HSA).
An HSA can be a great way to save and grow your money on a tax-advantaged basis as they offer triple tax savings. Contributions, capital gains, and withdrawals are all tax-free if you use your funds for eligible healthcare expenses.
#5: Fund Your Children’s Education
If paying for your children’s college education is a priority, consider using a portion of your windfall to fund a 529 college savings plan or other education-specific investment accounts.
A 529 plan is an investment account that offers certain tax advantages if the funds go towards qualifying education expenses. Contribution limits vary by state, but if you contribute more than the annual exclusion amount ($17,000 in 2023), you may trigger the federal gift tax.
You can also contribute up to five years of gifts at once, per beneficiary—up to $85,000 in 2023. That money can then grow tax-free until your children go to college.
#6: Pay Down Low-Interest Debt or Give to Charity
If you’ve gotten this far on the list, you’re well on your way to financial freedom. It’s up to you to determine which financial goals you want to prioritize next after a windfall.
For example, some people may choose to pay off any remaining low-interest debt like a mortgage. This can free up a large portion of your fixed monthly expenses, allowing you to focus on other financial goals and aspirations, like buying a vacation home.
Alternatively, if philanthropy is important to you, consider using a portion of your windfall to support the causes and organizations you care about. Not only will you make a positive impact, but you may also benefit from tax advantages associated with charitable giving.
Chladek Wealth Management Can Help You Prioritize Your Financial Goals After a Windfall
Coming into a windfall provides a unique opportunity to reassess and prioritize your financial goals. By following these steps and working with a trusted financial advisor like Chladek Wealth Management, you can develop a comprehensive plan that maximizes your newfound wealth.
To learn more about how we help our clients prioritize and achieve their financial goals, please schedule a Learn More Call. We look forward to hearing from you!