Personal Finance September 3, 2015

    A financial windfall can be a life-changing event. Perhaps you've received an inheritance, or sold a business for a significant profit. Along with the money will come financial decisions that you may never have expected to face. Here a few practical tips:

    First, slow down. In the first rush of excitement, it's easy to sink newfound wealth into impulse purchases, gifts or promises that you may later regret. Before you do anything, put the money somewhere safe for at least three months while you explore your options and gather the information you'll need.

    Set aside the amount you need for taxes. You don't owe estate tax on inheritances (unless the lifetime total is over $5.43 million in 2015), but funds from sources such as a legal settlement, work-related bonus or short-term capital gains are taxable at ordinary income tax rates, which top out at nearly 40%. Figure out your tax bill, put aside an amount to cover it and consider that portion of your windfall spent.

    Pay down high-rate debt. With average interest rates on new credit cards at roughly 15%,1 if you're carrying high-rate consumer debt, paying it off is one of the first things you should do. Retiring your mortgage or student loans could make sense, too, but keep in mind that if the interest rate on those loans is low and you're taking a tax deduction for interest expense, you may get a better return by keeping them and investing your money elsewhere.

    Invest for the long term. If you've been taking an aggressive approach to retirement investing—common advice for people in their 20s and 30s—you may want to shift gears. Once you've got money, the goal becomes preserving it. That could mean transitioning from a largely all-stock portfolio to one that focuses on fixed income, or tax-free investments such as municipal bonds.

    Treat yourself. Once you've thought everything through and dealt with the practical aspects of your windfall, you owe it to yourself to enjoy a portion of the money. Make a list of what you want—a new car, a trip to Thailand or a home with a view—and prioritize the things that will bring you the most happiness. After all, you only live once.

    How Schwab Intelligent Portfolios® Can Help

    Schwab Intelligent Portfolios can help you open separate portfolios for the diverse ways you may want to use your windfall, including a down payment on a house, a rainy day fund or retirement savings. Take the Investor Profile Questionnaire to get started.

    1. Weekly Credit Card Rate Report, as of July 8, 2015.

    Investing involves risks including possible loss of principal.

    This information is not intended to be a substitute for specific individualized tax, legal, or investment planning advice. Where specific advice is necessary or appropriate, Charles Schwab & Co., Inc. (“Schwab”) recommends consultation with a qualified tax advisor, CPA, financial planner or investment manager.


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