Imagine opening your banking app and seeing a higher balance than you have ever seen. Maybe it’s from a bonus, an inheritance, a legal settlement, or even winning the lottery. Any time you receive a significant amount of money outside of your usual income, it’s a windfall that requires special thought and handling. This guide is designed to help you avoid mistakes, decide on goals, figure out how much you will have after taxes and fees, and know when to bring in a professional.
While You Are Considering Next Steps
If you’ve ever dreamed about winning the lottery, you might have imagined how you would spend or invest a windfall. But real money is different from fantasy money. Despite stereotypes (and sensational news stories) about lottery winners quickly squandering their fortunes, research suggests most people are quite conservative in their approach to windfalls. For example, a study on Swedish lottery winners published in 2023 by the National Bureau of Economic Research, found that, overwhelmingly, they held the vast majority of their funds in cash and other conservative assets for years following the event.
That’s what I see in my work with investors who have received a large cash windfall: They opt to keep all or most of the money in cash. It’s a sensible approach to start, but not for years on end. Before you decide on what to do next, put your funds into a conservative investment that will generate interest but give you ample liquidity, such as a high-yield savings account, money market fund, or short-term bank certificate of deposit (CD).
Deciding On Goals
Joe Delaney, a financial advisor with Robertson Stevens, notes that a common mistake among investors is acting hastily or making “lifestyle upgrades” without a solid strategy or consideration for longer-term impact.
So try to focus on giving yourself at least a month and a maximum of two years before making any big money moves (other than to that high-yield cash account). Move when you are in the right frame of mind. That timeline is entirely up to you, understanding that certain windfalls, such as an inheritance from a parent, or a settlement from a physical injury, come with heavier emotional baggage than others.
To avoid falling into the cash trap and having your money eroded by inflation over the years, set yourself a deadline for when you are going to decide on your goals and how you will invest your windfall to reach them. Here are some common financial goals to consider–depending on your age and your previous financial condition.
- Building an emergency reserve (should be three to six months of your living expenses).
- Paying down debts (personal, auto, credit card, mortgage, home equity loan or line, business).
- Major purchases (buying a home or business or funding a bucket-list vacation or celebration).
- Education funding (for yourself or your children).
- Financial independence (freedom to live off your assets and not need to work, whether that means at a traditional retirement age or a lot sooner).
- Charitable giving (directly or through Donor Advised Funds or trusts).
- Gifting to or providing care for loved ones (directly or through trusts).
- Leaving behind a legacy for loved ones or charity (directly or through trusts).
If any of these goals resonate with you, take it a step further. Assign a dollar value to the goal, dates, and other relevant expectations. Here are two examples of complete financial goals:
- Put a $140,000 down payment on a $700,000 house in two years, when you expect to be married and ready to start a family.
- Invest enough money to be able to pull 5% of $2,000,000 ($100,000) in extra income per year by the age of 55 without needing to work.
Once you’ve nailed down your goals, regularly revisit and adjust when necessary.
Millennials
As a generation, Millennials, now aged 30 to 45, aren’t doing as badly financially as once was feared–in fact, on average, they’re ahead of where the Baby Boomers and Generation X were at the same age. But that average doesn’t change the fact that many still have high debt-to-income ratios. It is unsurprising, therefore, that an Empower survey found that 52% of Millennials reported that they would use a financial windfall to pay off debt, the highest of any age group. With many having started their careers during the Great Recession, Millennials also tend to be risk averse.
The wisdom in opting to pay off debt depends on the kind of debt, the interest rate on that debt (compared to current rates), your other financial goals, your tolerance for risk and what else you might do with the money. For example, I know many Millennials who bought homes before mortgage rates started rising sharply in 2022 and were able to snag 30-year-loans at rates between 2.5% and 4%. In 2025, cash and cash equivalents yielded higher returns than that, making it financially wise to invest toward other goals (say, kids’ education or retirement) and hold onto that low-rate mortgage.
On the other hand, I recently chatted with a woman who received a $200,000 inheritance and was planning to invest it in conservative, lower-return investments, even though she had borrowed against a Home Equity Line of Credit (HELOC) at an interest rate of 8.5%. In her case, the numbers showed paying down her HELOC would be more attractive. She took my suggestion, and did that.
Gen X
Gen Xers, ages 46-61 in 2026, are often characterized as the sandwich generation, meaning they face financial pressure to help both children and aging parents. In fact, 72% of Gen Xers say providing for their children is a top financial priority, according to a Gen X study from Equitable. This has led to high debt and low retirement preparedness, per FINRA’s 2024 The Forgotten Generation podcast.
Delaney finds that Gen Xers tend to focus on retirement security, including “tax strategy, portfolio balance, and ensuring the windfall strengthens long-term security rather than just near-term consumption.”
Balancing Current And Future Needs
I recently sat down with a 50-something investor who came into a $1.8 million windfall. Before the windfall, he was having trouble meeting his household living expenses, was behind on retirement planning, and had big private school tuition bills for his children. Unaccustomed to that large sum of money, he was amazed to see that his 3% money market account was generating $54,000 per year. The problem was that his expenses (including tuition) had climbed to $301,000 a year, while his household income before taxes was $230,000 per year. Although he had a current income need, remaining that conservative would deplete a large windfall that, if handled properly, could help him meet all his goals.
Rebalancing this investor to a growth-and-income-oriented portfolio meant that he could pull income from the investments for his current needs, while allowing most of the $1.8 million to continue to grow for use in his retirement in 10 years.
Like this investor, when you have short-term and long-term goals, it’s critical to figure out an asset allocation that can support both goals. Don’t starve today while awaiting retirement tomorrow. But use your windfall as an opportunity to balance your current and future needs, addressing each in priority order.
How To Figure Out What You’ll Be Left With
Depending on the type of financial windfall you receive, you may need to do some calculations to figure out how much spending power your assets have.
Fees
Some windfalls might come with significant fees before you are paid. As a rule of thumb, if your windfall involves lawyers, they are often receiving a chunk of the total. I once spoke with an investor who had a legal dispute over unpaid wages and the company offered compensation in private stock. The investor had to pay the lawyer 30% of the market value even though he couldn’t sell the stock. Certain kinds of assets might also come with significant costs associated with their sale, including real estate, businesses, and privately held investments. If you are receiving cash or publicly traded securities, fees are often slim to none.
Taxes
Here are windfalls that count as ordinary income and are highly taxed on a federal level (maximum of 37%), and could be heavily taxed on a state and local level depending on your state (a maximum of 13.3% in California and 15.8% for New York City residents):
- Employer bonus
- Distributions from an inherited pretax retirement account
- Lottery or gambling winnings
- Selling a highly or fully depreciated asset at a gain
- Gains from an investment you have held for less than one year
- Most non-physical injury legal settlements
So, the maximum income tax one could face on a windfall tops 50%. If you’re in this position, consider holding half of the total windfall in conservative liquid investments for taxes if they were not already withheld. (Note that some windfalls that come from the sale of long-term assets–say the sale of your business, or of appreciated stock someone gifted to you–face a lower top federal tax rate of 20%.)
Here are some windfalls that don’t usually face income tax:
- Tax refunds
- Cash gifts
- Life insurance proceeds
- Compensation for a physical injury or sickness
- Certain legal settlements related to physical harm
- Inheritance of most appreciated assets, including businesses, properties, investment portfolios and Roth retirement assets.
Note that to the extent an inheritance is subject to either the federal estate tax, or state estate or inheritance taxes, that levy is paid by the estate before assets reach you as an heir. While the federal estate tax exemption is now $15 million for an individual ($30 million for a couple), most of the 17 jurisdictions (16 states and the District of Columbia) that impose estate or inheritance taxes hit far smaller fortunes, meaning this is a planning issue many families need to think about, including those who have themselves just received a sizable inheritance.
When To Bring In A Professional
If you made it to this point in the article and don’t know how to proceed, that is a good indicator that it may be helpful to bring in a professional. Accountants and enrolled agents can calculate your likely taxes. Financial planners and advisors can help you organize your short- and long-term goals, running scenarios to figure out how much you need for each goal, and guiding you through how to optimally invest to meet those goals. Depending on the size of your windfall, it may also be time to consult a trust and estate lawyer, to update your planning.
Managing a financial windfall requires thoughtful planning and balancing between short- and long-term goals. By understanding taxes, fees, and investment options, and seeking professional guidance when needed, you can make informed decisions. Prioritize your goals, allocate wisely, and revisit your plan regularly to ensure your windfall supports both your current needs and future aspirations.