What to do with a sudden financial windfall
A 19-year-old California woman who recently won the lottery twice in one week already has a plan for what she'll do with the $655,000: shop. Rosa Dominguez told The Associated Press she plans to go on a spending spree, including buying a car.
The urge to splurge after coming into a financial windfall is understandable, even with federal taxes immediately halving the loot. But Dominguez, who won $555,555 and $100,000, respectively, on two different five-dollar scratch-off tickets, may want to consider the fate of the many lottery winners who eventually went bankrupt or quickly ran through their entire winnings because they made less than savvy financial decisions.
While financial experts say it's OK to use a portion of such windfalls to indulge in some frivolous spending, they recommend saving most of the money as a step toward ensuring your financial future. Here's how to save wisely:
Don't spend everything at once. First, pay down any outstanding debts so you can start fresh. Only then should you consider spending -- conservatively -- on something more fun.
"A shopping spree and a car would be OK if, say, the car is a $15,000 to $25,000 car that is very reliable and can be driven for 10 to 15 years. Even a few thousand dollars on a shopping spree, although perhaps unnecessary, is not going to hurt. When the upfront spending on a windfall of, say, $500,000, begins to creep past 5 percent of the windfall, you are now getting into dangerous territory," independent financial adviser Kyle Mast said by email.
As for the rest of the money, using it to reach big financial goals, like buying a home, paying for education or creating a retirement fund, is a wiser was to capitalize on your luck.
Plan for the long term. For young people who suddenly come into money, one of the biggest considerations is the long time horizon over which they can invest her money. With compound interest, being able to put money in various investment accounts and allow it to build over decades means almost guaranteed financial security later in life.
"A 19-year-old who can put $100,000 away and average a 6 percent annual return would have about $1.5 million at age 65. Talk about having a self-funded retirement at the age of 19!" financial adviser Pierre Jouve told CBS MoneyWatch.
Invest in education. If college education is a consideration, being able to pay for it outright, rather than taking on loans, is another way to maximize the financial benefit of getting a windfall. After all, the average U.S. college student graduates with $37,000 in loan debt, and the interest on those loans is rising as the Federal Reserve has raised rates.
"She could use a portion to fund a college education or professional certificate program without the need for high-interest student loans that rob retirement savings now and in the future," financial adviser Charlie Shipman said of Dominguez.
Consider other options. Finally, purchasing an investment property could be a good option -- as long as the purchaser is aware of the home maintenance costs and the potential for maximizing that investment over time. Even if a property is not always used as the main residence, it can be rented and used as an additional source of income.
Perhaps the most important thing is to take time to consider all of the options before making big spending decisions.
"I always like for my clients to have options as they go through life, so I personally [advise] her or any windfall recipient to save a large chunk for the options that lie ahead, especially a 19-year-old," financial adviser Breanna Reish told CBS MoneyWatch. "She has many, many years ahead of her. She may want to buy a home someday, pay student loan debt, travel. These options will be harder to find if she spends all the money today."
