What Should You Do With a Sudden Windfall?

If you received $1 million tomorrow, what would you do? How will taxes work? How much should you save from it? Will this windfall enable you to be set for life?

Written by Adam on 2018-06-04. Minafi, Blog, Investing, personal, Canonical. 10 comments. Find out how I make money.

Having a sudden windfall is an exciting, exhilarating time. I’ve been lucky enough to receive two windfalls over $100k in my life (so far). The first time was when my mom passed away when I was 23 and I inherited $100,000. It completely changed my life by introducing me to investing much sooner than I would have otherwise encountered it.

The second time was when the company I was working at (Code School) was acquired. I was fortunate enough to end up with an extra $400,000 from the deal. I was 32 at the time and leading the largest team (by headcount). I’d started working there for about 4 years earlier, joining a month or two after the company was incorporated (in other words: right place, right time, and working hard).


Both of these windfalls were sudden and unexpected. The difference between how I handled these two situations is night and day. 23-year-old me didn’t have any idea how to invest, had never heard of an index fund and was clueless about taxes. 32-year-old me had been investing for nearly a decade.  I was able to capitalize on that gain and immediately let that windfall start making money for me – in my case by investing it.

This article is about what I wish I knew when I was 23 and encountered that windfall.

What is a Windfall?

In the financial world, a windfall is a sudden influx of money. It could be unexpected, as the case is with lottery winners and inheritance. It could also be planned ahead of time – like with the sale of a business or a planned deal that pays out over time. A windfall can also be your first paycheck at a new job that’s higher than you’re used to, a performance or yearly bonus at your job.

The one thing it is though: it’s more than you usually earn and all at once. It’s also cash. If you were to suddenly get a lot of company stock, or win a car, that’s awesome too, but what you would do under that scenario would be different. Those could be a windfall of stock or a windfall of a car. When people generally use the windfall term alone, it refers to a windfall of cash.

Set Aside Money for Taxes

The tax differences between winning the lottery, selling a business and inheriting a lump sum are all very different. I’m not a tax professional, and frankly, it’s a topic that still scares me when talking about large numbers. For the purposes of this article, I’m going to recommend you talked with a tax professional and set aside money for taxes.

For me with the inheritance, there were no taxes on the gains. As of today, in May 2018, the estate tax (negatively referred to as the “death tax”) only starts to kick in when the inherited estate is above $11,180,000. Seriously! That’s so deep into the Fat Fire territory that’s we’re talking obese FIRE.

The estate tax minimum amount to be taxed has grown a bunch over the years. It’s actually interesting to look at when the estate tax kicks in based on estate amount has changed over time:

2004 $1,500,000
2005 $1,500,000
2006 $2,000,000
2007 $2,000,000
2008 $2,000,000
2009 $3,500,000
2010 $5,000,000
2011 $5,000,000
2012 $5,120,000
2013 $5,250,000
2014 $5,340,000
2015 $5,430,000
2016 $5,450,000
2017 $5,490,000
2018 $11,180,000

Yes, you’re reading that right. Over the last 15 years, the estate tax has grown from starting at $1.5 million to $11.8 million. If you or someone you know passed away now in 2018, there wouldn’t need to be a dime paid on their estate if the total value of their estate is under $11.8 million. (note: again, me = not a tax professional, but that’s my read of this data).

I hadn’t looked at this numbers since 2005 when my mom passed away, but looking at them now, it’s truly amazing to me that this has grown up more than 1000% over a decade. Do the rich really need that much of a tax cut? (I’m resisting the urge to climb on a soapbox here).

Whatever your situation, be sure to understand the taxes applicable before deciding what to do with the rest of it.

Reduce Taxes by Giving to Charity

If you are receiving a very large amount, and you want to eventually give some of it away down the line, it could make sense to donate that money in the calendar year that you receive it. One possible route you can go with this is to open up a donor-advised fund (DAF). A DAF is a separate account that holds your donations – which could be in the form of cash or stock.

What’s great about a donor-advised fund is that you give from there whenever you want while it grows. If you’re considering giving money to charity down the line, consider setting that money aside at the time you receive it.

A Word on Housing Inheritance & Taxes

If you inherit a home, there’s a chance that won’t count towards taxes if it’s a primary residence. I mentioned that my mom was kind of smart in this. She listed me as a co-owner on the house we lived in and I grew up in. That bypassed any regulations around inheritance and just allowed me direct access as a co-owner outside of the inheritance process. If you’re planning your estate and are in a similar situation (single parent) then that might be worth considering.

Taxes on the Estate

Even for estates, money is often stored in an “Estate of <deceased>” legal entity before it’s distributed out to the recipients. This is what happened with my mom’s estate – even though she left everything to me. If the estate generates money, even in the form of interest from a savings account, you may need to pay taxes for the estate. Again, it’s best to bring your paperwork to a CPA if you’re unsure.

This tax will likely be only a portion of the gains, not tax on the entire amount in the estate. Depending on the gains, you may not have to pay taxes at all on it, but it’s something to be aware of.

For lottery and the sale of businesses, you’ll really want to understand this. There are countless stories of people getting into trouble by winning a car on a game show and not realizing they had to pay taxes on it – only to have the car repossessed come tax season.

If you’re asking the question “How much tax will I pay on my windfall?”, the best thing you can do is talk to a CPA about your specific situation. That’s one area even I’m scared to go the DIY route.

Takeaway: Understand what amount of your tax situation is, even if it means paying someone else to do it.

Receiving a Windfall

At some point, you’re going to receive the windfall into an account you own – most likely in your checking or savings account.

Don’t worry about FDIC Limits

For checking and savings accounts at banks in the US, there is a $250,000 FDIC insured deposit amount that the government backs. That means that if the bank went out of business tomorrow, the government would still pay you back up to $250,000.

If you’re inheriting more than this, you may be asking “Am I safe depositing more than that? Should I open multiple accounts each with $250,000?”. Is there somewhere else I should deposit my money? I wouldn’t worry about that. Instead just choose a major bank. Your money won’t be there forever anyway, so it just needs to be safe for a while. The chances of the bank going out of business and losing your money in the short time your money is there is pretty slim. Even in the 2008 crisis, no one in this situation lost their money.

This is the important part though: your money won’t stay at this bank. It’s clearly possible for you to just park your windfall in a checking account and live off it until it’s gone, but there are better ways! For one, you probably want your windfall to make you more money. If you have a windfall of $100,000, that’s potentially $4,000 for the rest of your life if you play your cards right. That’s a lot better than $4,000 for 25 years.

Money Market Accounts Are Your Friend

When I received my inheritance, my bank had set up a “money market” account to store this in with a 5.5% interest rate (man, 2006 was a crazy time!).

This was a completely new term for me. One night I was at the ATM, about to deposit a huge amount when the machine gave me a warning I’d never seen before:

The value of money market accounts is variable, and your holdings may go up or down.

I actually stopped my deposit right there and called my financial advisor to ask about this. Was this money market account a stock or bond? Would it fluctuate? What do they mean it could it go down? How much?

Luckily they work very much like a savings account. Unlike a stock that is backed by a certain price, money market accounts have an interest rate associated with them. The interest rate in money market accounts today are generally under 1%. That means that if you have $100,000 in a money market account for a year, you’ll receive $1,000 in interest over the course of the year.

The reason for this is because the bank is using your money. They’re investing it in mortgage loans to other people and other services that they need your money to fund. They give you a percentage of their gains in the form of that interest rate.

The reason your holdings could/would go down is if the interest rate were to go negative (it’s possible but very unlikely). For instance, if the interest rate dropped to -1% and you had $100,000 in the account for a year, you’d have $99,000 in there at the end of the year. At that point, you’d be paying for the privilege of using this account.

This is not something that’s ever happened in the US but has happened in some other countries with unstable currencies. Japan, Denmark, and Sweden have negative rates today. It doesn’t mean those economies are in trouble, but it is a strong motivator to people in those countries to spend their money elsewhere (investing it) rather than leaving it at banks.

As long as the interest rate is positive, and you’re at a big bank, you should be able to sleep well at night safe in the belief that your funds are in good hands and it’ll still be there tomorrow.

What Should You Do With A Windfall?

Ok, so you have the money, now you just need to figure out what to do with it. There’s a visualization created by a Reddit user that I absolutely love for illustrating this.

Order of Accounts

The idea is to start at the top and take a look at where you are in your money journey. With a windfall, you may be a position to fill up a BUNCH of these buckets at once.

For example, if you don’t have an emergency fund and your windfall is roughly 3 months of your spending, just save it! Keep it in a checking or money market account and call it a day. Live with an emergency fund and a buffer between running out of cash and having to worry about overdrafting is well worth the peace of mind to just keep money there and enjoy a life upgrade in form of less stress.

After that, I’d start by earmarking parts of your windfall for 401k match at your company (if offered) followed by paying of low-interest debt (less than 5%). If I had a huge loan, like a student loan with a low-interest rate and had to choose between paying that off and investing it, it’d be a hard choice. There’s something satisfying about paying off a large amount at once and just being done with that. The same could be said for paying off an entire mortgage with your windfall.

Should I pay off my mortgage with a windfall?

This is a complicated one. When I received my 2nd windfall, I was in a place where I could’ve paid off my entire house over $200,000. I decided not to pay it off, a decision I am extremely happy with in retrospect. I’d strongly consider not paying off a house/student loan outright. Instead, think about what amount you can pay on top of the current balance each month to pay it off waaay sooner than you would. Instead of aiming to pay off your house in 30 years, maybe think about paying it off in 15 years, or 10 years.

There are a few reasons for this. For one, stock markets generally return higher returns than a mortgage or student loan. If you were to pay this off all now, that’s money not invested (that’ll come next) that’s making you money. For two, you can’t get that money back. Once it’s paid off, you limit your options. If you’re like me, when you’re getting into all this investing stuff, you want to stick to the shallow ground – the part of the pool you know. Paying off a mortgage or student loan may be in that area. You can live there safe and have a great time, but there’s a lot more out there if you learn about.

Takeaway: I’d recommend you don’t pay off your mortgage all at once. If you want to pay it off early, try putting more towards the principal each month and paying it off in half the time.

How to Invest a Windfall

Using your money to make more money is the dream right? Having your money make more money for you has a lot of different flavors. You can start a business, invest in real estate, flip items bought at garage sales, start a blog – whatever you enjoy.

I’ve dipped my toe in real estate and realized it’s not something I’m interested in. It’s an area where people can make a lot of money, but it can be a lot of work and stress. If you want to go that route, there are smarter people than me. For the purposes of this post, I’m going to focus on the method I use to turn money into more money: investing it in the stock market using diversified low-fee index funds.

How Do You Invest It?

There are 3 major paths you can go down to invest

I started with a financial advisor when I came into my first windfall. I assumed that there was so much to learn that it would be impossible for me to do it. Turns out, it’s really not that hard – but it does take some leaps of faith into managing and being responsible for your own funds. It also takes time to learn the ropes.

Investing with an Advisor

I’d strongly recommend against going with a percentage fee advisor. Instead, what you could do is go to a fee-only advisor instead. Rather than managing your funds and taking a cut each year, a fee-only advisor is exactly that – you meet with them and pay them a fee. Think about it as an account audit with next steps for you to complete. I’m here as a free-only coach if you want a second opinion.

If you go with a financial advisor, make sure to ask if they are a fiduciary with a duty to you. A fiduciary has a legal or ethical relationship with someone to give advice in their best interest. Make sure their duty and interest is with you, and not with someone else.

For my first windfall, I invested with a financial advisor. They selected a number of funds that were load funds. Load funds are investments that cost you money for the privilege of investing in them, either up front, or when you sell the funds. In my case, it was an American Funds front-load fund that charged 4% fee up front. That means if my advisor had put $100,000 into this fund, I would have been charged $4,000 right there. This is a massive red flag.

If you end up talking with an advisor, here are the top things to ask about:

  • What are the fees you charge? Advisors generally charge 1% of your total investments under management. Since funds generally return 7% on avg, you’re paying about 15% of your gains for their service.
  • What are the loads, purchase fees or redemption fees for the funds they want to select? These should be $0. If they’re anything besides $0, then the advisor is likely making a commission off you by choosing it.
  • What are the expense ratios of the fees of the funds they recommend? Fees are a huge topic. I don’t invest in any funds with a fee about 0.20%, and most funds are under 0.10%. If the fees of funds they’re selecting are above 0.40%, run away. When you add their fee (1%) plus this fee (0.40%) the total fee is 1.40%. A “good” fee if you do it yourself would be closer to 0.05%.

Investing with a Robo-Advisor

If you want a shortcut, Robo-advisors like Wealthfront and Betterment are both solid choices. The 0.25% fee they charge isn’t massive. Over 30 years, starting with $100,000 you’d potentially pay $77,000 in fees, compared to $20,000 if you go the DIY route. In that time, the balance would grow over a $1m for each though!

Starting with a robo-advisor can be a good way to get an understanding of how investing works. I used to be against the idea of using robo-advisors in the idea of doing it yourself but recently decided there is a spot for these when getting started. For me, if I had gone with a robo-advisor instead of a financial advisor, I’d have considerably more money in my accounts today.

I do think that initial experience working with someone else can be hugely beneficial. You could start with a robo-advisor with a goal of eventually understanding enough to do it yourself down the line.

Side note: I do not have any commission/affiliate programs with any robo-advisors or advisors. I’m recommending them from a belief they could be right for your situation.

Investing Yourself Using a Brokerage Account

If you do decide to go the personal route and invest on your own, it’s going to take more work up front, but after a certain point it’s going to feel as easy as breathing (really!).

At a high level, here’s what this looks like (we’ll get into the details later):

  • Find a brokerage account to invest your money in (ex: I use Vanguard).
  • Link that account with your bank (just like you would do to link your auto loan to your bank account).
  • Decide on what you want to purchase in your brokerage account. (we’ll get into some recommendations on this)
  • Purchase those funds, which transfers money from your bank to the brokerage account – switching your ownership from cash at a bank to stocks, bonds, ETFs or mutual funds at a brokerage.

There’s a lot going on there. These steps are covered in the first 5 weeks of my Minimal Investor Course. Specifically these weeks:

  • Week 1: Getting Your Accounts In Order
  • Week 2: Understanding Diversification (what you should invest in).
  • Week 3: All About Fees
  • Week 4: Tax-Efficient Fund Placement
  • Week 5: Making Your first investment

By week 5 in this free course, you should know everything needed to make your first trade. If you’re interested in getting an email a week to help you learn how to invest, sign up!

Some of the core concepts in this course can also be learned through some articles here on Minafi:

The core of this course and these articles can be compressed down into a single sentence:

Invest what you can in diversified, low-fee index funds in the most tax advantaged account type for your situation.

Unpacking that sentence and being able to understand that you’re hitting those checkboxes may sound like a lot of work. People go to school just to become financial advisors after all, right?

This system for investing is way simpler than that. It’s what Warren Buffet recommends when asked about how to invest. It’s what I’ve used to amass over $1m slowly.

Your Next Step

If you’ve just received a windfall, here’s a recap of what you could think about.

Understand your tax situation. This is going to be different depending on how you received it, but it’s essential to know.

Transfer funds to somewhere you can control. If you pick any major bank you shouldn’t need to worry.

Create an emergency fund and pay off high-interest debt. In my opinion, this is the absolute best use for your money if you need to.

Start investing your money. You have a lot of options here. The absolutely easiest one is investing. If you throw it all in a Betterment or Wealthfront account (I prefer Wealthfront) you’ll be in a better position than if you choose a financial advisor. I recommend eventually learning how to do this on your own, but robo-advisors are a great stepping stone to get there.

Have ever received a windfall? What did you do with it? What advice would you have for others who have received a windfall?


Hi, I'm Adam! I help millennials invest to reach financial independence sooner than they ever thought possible. Want to see what you could do to reach FI sooner? You're in the right place!


Why not add to the conversation below? Your voice is welcome!


June 4, 2018

I did inherit a million dollar windfall a few years ago from my parents’ estate as did my brother. I spent $25k of it to upgrade our old and unreliable hobby equipment (fishing boat and side by side ATV). The rest of it, 97%, went into investments at Personal Capital. But I was already a multi-millionaire with a paid off house and zero debt so it was in no way a life changing amount of money. I still buy used cars and live frugally but I did retire slightly early which was an easier decision after I received the inheritance

Ohh, shedding more light on the mystery of Steveark. With that of windfall, giving that additional cushion and relief before retiring early is a nice to have. That difference between being 80% and 100% certain of money lasting (based on past performance) is still mostly there, but it’s hard to argue with near certainty.

Passive Income NZ

Passive Income NZ

June 4, 2018

Good read- you are missing a 0 on the table at the top. Shows 11,180,00 rather than 11,180,000.

Ohh good catch! Thanks for that. Updated!

To me as long as someone is still relatively young (and I include age 50 in that category) I’d put it in VTSAX and spend about 3.5 seconds dealing with it. Time is money. Once you’re older a windfall would be more complicated to invest, but for the young, buy the market.

Congrats on your windfalls!

Putting it all in that one would be good advice. Understanding why that’s good advice (if you’ve never invested) is the hard haha. I’d agree though, if I could put money into 1 fund that’d be it. If two, add a total bond fund.

I sold a house I inherited last year and received slightly less than $30k for it. Since I lived in it for 10 years and made less than $250k (I think that’s the limit), I didn’t owe any taxes. So I maxed out my Roth IRA and HSA for the year and paid a boatload of student loan debt.

No regrets.

Sounds like a great use of those funds! Unlike mortgages, student loan debt is one you just can’t get away from. Paying it off faster makes sense.

Hi Adam. Thank you for this article. I’m very new to investment and the financial world in general but I am motivated by the driving need to deliver myself from financial slavery. Your article is clear and easy to understand. I wonder if you also mentor, even for a fee.

That’s not something I’ve currently tried, but I’d be interested in talking about it to see. I’ll reach out to you on email and chat.

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