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What is a Windfall?

The money paid out for winning the lottery is a type of windfall.
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  • Written By: Tricia Ellis-Christensen
  • Edited By: O. Wallace
  • Last Modified Date: 30 March 2014
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Windfall has numerous definitions. These range from a tree that falls due to a sudden storm, to fruit fallen from a tree, or to a rush of wind from the shore that suddenly gives a ship more room to navigate and greater speed. In finances, windfalls are tied to an unexpected, and generally large, sudden inheritance or otherwise acquired cash. Winning the lottery, getting a huge end of the year bonus, receiving back taxes you didn’t expect or any other number of things can result in a windfall.

There’s certainly many people who would love a windfall, and see that elusive “ship coming in” as the end to all problems. While it’s acknowledged that suddenly having the cash to take care of financial troubles is perhaps a blessing, the Bible may not be wrong when it says that money is also a curse. It turns out that there are many people who have previously led lifestyles that don’t do well when they get a windfall. The larger the windfall, the more complicated matters can get.

First, there is the issue of taxes. A lottery winner of a large sum of money may need to pay a lot of them. People who normally did their taxes alone before often have to hire accountants and financial advisors to navigate through the taxation nightmares that occur if they suddenly become millionaires. There’s also consideration on how to spend a huge sudden influx of cash.

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Some studies have shown that people, who’ve won “moderate” to large amounts in lotteries, have a tendency to spend that money quickly, since they are unused to managing large amounts of cash. They can quickly get greedy, become victims to scam artists, or they may simply make bad decisions about the disposition of their funds. Then there are the relatives, friends, and many people who are not friends who may have sudden expectations that they have a right to part of your windfall. Such expectations may cause a person to spend faster, or may result in strained relationships.

Financial advisors suggest that you should treat any windfall, large or small, as a potential to invest or secure a portion of this money. If you get a large and unexpected “fall” of money, use a good portion of it for retirement savings accounts, or use it to start an IRA or money market account. This may not be glamorous, but it can greatly contribute to your comfort at a later point.

If you have pressing debts, consider paying these off so you can start financially fresh. Depending upon the amount, save a little for a treat, but use most of your suddenly acquired funds to release yourself from debt and plan for your retirement or the education of your children (even if you don’t have any presently). Experts differ on what percentage of suddenly acquired funds should be invested, and where it should be invested, but this percentage frequently depends upon how much of the money is needed for debt clearance.

It’s okay to take a while to make decisions about how an unexpected supply of cash should be spent. In fact it’s the prudent thing to do. But it’s often difficult to resist the lure of ready money and the pull to purchase luxury items you may later wish you hadn’t.

While people may be envied for receiving a windfall, and we concede that this is perhaps an enviable position, it’s also one that can change life dramatically, for good or ill, and it requires conscientious thought and sound decision-making skills.

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