It’s exciting to hear about the latest lottery winner, but there are also stories of winners who quickly lose their riches by spending recklessly. How can you enjoy your windfall while being responsible? What steps should you take when you receive unexpected money?
Types of Windfalls
What is a windfall? Merriam-Webster's dictionary defines it as “an unexpected, unearned, or sudden gain or advantage.” There are a few ways you can suddenly find yourself with such a gain: lottery winnings, inheritance, settlement, unexpected bonus, property/asset sale, large tax refund, etc. It’s not just about Lotto Max.
First, Take Your Time
Most windfalls come with either excitement or grief, and it can be difficult to make rational decisions when in such a moment. That’s why the first step is to take a pause. Most bad financial decisions are made in one of two instances – when overcome with emotion or through a snap decision. A windfall is a recipe for both – a pause is critical before using any of your newly found money.
Always Consider Taxes!
Before you start planning to spend, you must consider taxes! In Canada, lottery winnings are non-taxable. However, some windfalls come with taxes. An inheritance, sale of property, bonuses, etc. can attract taxes. Therefore, explore if any taxes need to be paid. If so, calculate how much and set the necessary money aside; somewhere safe, and easily assessable – remember some investment types are un-cashable until maturity and others take time to sell so ask how easy and how much time is needed to get the money in your bank account before committing to anything.
Develop a Plan
The next step, list your wants and needs for the remaining money - Make sure to consider debt repayment, saving for the future, and having fun. Once you have your list, highlight your priorities. What is doable? What is reasonable? Consider how each idea may impact your cashflow. For example, buying a bigger home or cottage involves larger utility bills and maintenance costs. Is this cashflow change feasible?
Once you have your list, it’s a good time to loop your Wealth Advisor into the conversation. There could be tools, strategies or timing considerations which will have a significant impact on how and when you should implement portions of your plan.
Long-Term Savings Considerations
Lastly, if you’re planning to invest a portion, consider future tax consequences. Investments in non-registered accounts can attract taxes in the form of capital gains, dividends and interest income. To mitigate this, you’ll want to explore maxing out tax-sheltered accounts (such as TFSAs) annually. Then for the remaining dollars talk with your Portfolio Manager about more tax favourable options. You may still have to pay taxes, but less is better.
Above all remember, while a windfall may have caught you by surprise, strategic planning can empower you to maximize its potential and secure your financial future.
To develop your plan or discuss tax-efficient options contact KLT Wealth Management.
Courtney Beach, QAFP
