A windfall can come in many forms – a bonus at work, a fat commission check, a tax refund, an inheritance from a relative, or a winning lottery ticket.

When your windfall comes, it may be fun to dream big, but you can dream even bigger if you plan for the future and invest a portion of your windfall for the long term.

While there’s a big difference between winning the lottery and getting an annual work bonus, even winning the lottery doesn’t assure you of a lifetime of prosperity. Nearly a third of lottery winners ultimately declare bankruptcy, according to a study by the Certified Financial Planner Board of Standards.¹ And an estimated 70% of people who receive a financial windfall squander it all within a few years, according to a study by the National Endowment for Financial Education (NEFE).²

So no matter how big of a windfall you receive, you need to take a prudent approach in managing that money in order to make the most of it in the short and long term. 

You may have an immediate wish list for your windfall money – such as paying off bills, buying a new car, remodeling the house, or donating to your favorite causes – but your windfall may be far more valuable in the years ahead if you invest at least a portion of it now.

For example, let’s say you just inherited $50,000 from a relative. If you spend half of that windfall to pay bills, take a vacation or buy a car, you would still have $25,000 to invest. By putting that money to work in the investment market, you may be able to amass a much bigger nest egg than the original $25,000. Keep in mind that investing involves risk, including the potential for loss of principal. 

The chart below shows an example of how much $25,000 would grow over the next four decades, based on a 7% per average annualized return. (Your return could be more or less than 7%.) This is a hypothetical example for illustrative purposes only, and not intended to represent the performance of any particular investment product, nor does it take into consideration any product expenses or fees.  The results would be reduced if costs were included.

As you can see, your investment would nearly double over 10 years to about $49,000, nearly quadruple over 20 years to about $97,000, grow nearly 8-fold over 30 years to about $190,000, and grow about 15-fold over 40 years to about $375,000.    

The following are some other actions you should consider if you receive a windfall:

Need professional help? 

The size of your windfall may dictate the level of professional assistance you need. 

If it’s an avalanche -- you won the lottery, won the jackpot or inherited a large sum – you may want to consult with an accountant, an attorney and a financial advisor to help you manage your money. Find a Thrivent Financial representative who can help. Thrivent Financial Representatives are registered representatives of Thrivent Investment Management, Inc., an SEC-registered investment adviser and broker/dealer, and a member of FINRA and SIPC.

But if your windfall was a $5,000 to $10,000 work bonus or tax refund, you may not need the help of a team of professional advisors – particularly if you already have some experience investing. Thrivent Mutual Funds is geared to self-directed investors, making it easy to open an account online and invest in one or more of our numerous mutual funds, including our Asset Allocation Funds. If you don’t consider yourself an experienced investor, but you have a few thousand dollars you would like to invest on your own, see What’s Holding You Back? Investing May Be Easier than You Thought.

Ideally, it would be good to put some of your money into a tax-qualified IRA, such as a Traditional IRA where you may be able to deduct the contribution on your current taxes.  Another option to consider would be investing in a Roth IRA where your contributions and any earnings can be taken out tax-free once you’re over 59 ½ and it’s been invested for 5 years. Learn More about Traditional and Roth IRAs to determine which one is right for you.

Note that there are limits to the amount you can contribute to an IRA. The 2017/2018 tax year annual maximum is $5,500 (or $6,500 if you’re 50 or over). If you have a larger windfall that you want to invest, you would likely need to invest the lion’s share in a traditional investment account without the tax benefits of a qualified retirement account. 

Don’t quit your day job

There are a lot of factors that may go into the decision on whether to keep working, but unless the windfall is substantial – millions of dollars – most people would be better served to continue working. Even a large inheritance of a million dollars or more could disappear quickly – as evidenced by the high percentage of lottery winners who have gone bankrupt.  

And once you’ve left the workforce, it may be difficult to return after an extended absence. It could be very disheartening regressing from retired to rejoining the workforce as your windfall evaporates.  

By keeping your job and investing your windfall, you can maintain or improve your financial status while still enjoying many of the finer things in life. For instance, let’s say you invest $1 million dollars in a municipal bond that potentially provides tax-free income with a yield of 3% (which is roughly the current market average).³ That would equal $30,000 a year in tax-free interest income over and above your wages that you could use on travel, entertainment, and some of the finer things in life without draining your investment nest egg. 

Prepare an estate plan

If your windfall was substantial – several hundred thousand dollars or more – this would be a good time to set up an estate plan so that your money would be more easily passed on to the heirs that you choose.

While an estate plan is a fairly complex document that may take many hours to prepare for you and your attorney, it can save your loved ones a great deal of time and trouble after you’re gone.

If you already have an estate plan, you may want to update it after you’ve received your windfall.

Set your priorities

Make sure that you address your most pressing financial issues with your new windfall. Here are some actions to consider when your windfall arrives:

Make sure all taxes are paid or accounted for before you spend the money. Although an inheritance or life insurance check may come tax-free, a bonus check or a lottery ticket typically comes with a hefty tax bill. First and foremost, pay your taxes.

Pay off high interest debt. If you have credit card debt that carries a high interest rate, paying down that debt should be a top priority. 

Do something fun now – and later. We all have dreams, and landing a windfall may give you a chance to check one of your biggest dreams off your bucket list. So whether it’s a better car, a trip to Yellowstone, a Caribbean cruise, a wardrobe upgrade, or a household remodel, pick one and enjoy it. But leave the bulk of your windfall available to invest for the future.

Invest as much as possible in tax-favored investment accounts. With a large windfall, you should convert as much as possible to tax-favored investments. That means contributing the maximum to your 401k at work and maxing out your IRA. (See: Found Money: Maximizing Your IRA Can Lower Your Taxes and Pump Up Your Savings)

Fund an education savings plan for your kids or grandkids. The money in a 529 or Coverdell college savings plan grows tax-deferred in the account, and can be withdrawn tax-free if used for qualified educational expenses. (See: Start a Coverdell Education Savings Plan)

Invest the rest. Even if you can’t invest all of your money in tax-favored plans, you can still put your money to work through mutual funds, stocks, bonds and other types of investments. By investing as much money as you can now, you will be giving yourself the opportunity to continue to benefit from your windfall for many years to come.

Set aside a reasonable amount for your favorite cause or charity. If you are passionate about a benevolent organization, this may be a good opportunity to make a contribution.

Pay down student loan debt. If you’ve been weighed down by student loan debt, you may want to use part of your windfall to cut down that debt to reduce your monthly burden (or pay it off entirely if your windfall was substantial). Since your student loan debt likely comes with a much lower interest rate than your credit card debt, the student loan debt should be lower on the priority list. 

Pay off your mortgage. If your windfall was big enough, paying off the house would be a good use for the money because it puts you in a better financial situation for the future. But if you have a mortgage at the current market rate, which is under 5%, there may be no rush to pay it off. At that rate, the cost of your money is at a historically low level. The long-term return in the stock market (S&P 500) over the past 50 years has been about 11%, which is more than twice the current average mortgage rate, although individual investment performance will vary from the S&P 500. Keep in mind, past performance is no guarantee of future returns and you may lose money in the market. 

By paying off your mortgage, you would also lose the potential annual interest rate deduction on your taxes. At Thrivent Mutual Funds, we recommend you consult your tax advisor to make sure you’re getting the most out of your investments. Thrivent Mutual Funds and their representatives cannot provide legal or tax advice.

After weighing all the factors, you may decide that investing the money in a mutual fund that holds stocks or a combination of stocks and bonds may be a better use of the windfall over the long term than paying off the mortgage. 

Forego these lottery winner miscues

There’s a reason one out of three lottery winners goes broke – they do stupid things with their money. Here are some of the worst ways to watch your windfall blow away.

Brag about it. The more low-key you can be about a windfall, the less resistance you’ll need to muster to ward off (or give into) monetary requests from your friends and relatives. Nothing wrong with a little generosity, but extreme discretion is advised.  

Gamble. There’s a reason for all the magnificent resorts in Las Vegas. Gambling favors the house, which is why many a windfall has been lost in the casinos. 

Buy a second home, a boat, a plane or anything else that costs money to own. Unless your windfall was substantial, you may want to think twice about buying something that costs money to maintain. Down the road if your windfall runs out, you’ll still be stuck with the costs of ownership. For instance, boats are fun – especially if you live on a lake – but they can cost a lot to operate, maintain, haul, dock, and store. As the saying goes, “with a boat, your two happiest days are the day you buy it and the day you sell it.” Try to use your windfall to put yourself in a better financial situation – not a financial straightjacket. 

There are many ways to spend a windfall and many strategies on how to divide it up between fun, necessity and investment. The key is to try to think beyond the moment and invest as much as possible to enhance your life for many years to come. After all, wouldn’t that be the best possible outcome from a windfall?