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WalletPrep worksheet · Life events

What to do with a windfall

Name ____________________ Date __________

Key ideas

  1. Park it first, decide later. Move it to an insured savings account, apart from checking, and wait 30 to 90 days before big decisions.
  2. Know whether it's taxed. Inheritances and gifts usually aren't income to you. Bonuses, prizes and lottery wins are. Settlements depend on what they pay for.
  3. Use it in order. Small fun slice, then high-interest debt, then a full emergency fund, then retirement and long-term goals.

Vocabulary

Windfall
A large sum of money you didn't plan on, like an inheritance, a bonus, a settlement or a prize.
Emergency fund
Cash set aside only for surprises like a job loss, a car repair or a medical bill. A common goal is 3 to 6 months of essential costs.
High-yield savings account
A savings account that pays a much higher interest rate than a typical bank savings account, often offered by online banks.
IRA
Individual retirement account: a tax-advantaged retirement account you open yourself at a bank or brokerage, separate from your job.
401(k)
A retirement savings plan offered through an employer. Money comes straight from your paycheck, often with an employer match.
FDIC insurance
US government protection that repays your deposits if an insured bank fails, up to $250,000 per depositor, per bank, per ownership category.

Work it out

Leo inherits $20,000 in cash. He owes $4,500 on a card at 24% APR, has $1,000 saved and spends $2,500 a month on essentials.

  1. Inheritance
  2. Fun money (10%)
  3. Pay off credit card
  4. Emergency fund to 3 months
  5. Left to invest
  6. Card interest avoided at $150/mo

Check yourself

  1. You inherit $15,000 in cash from a parent's estate. Is it taxable income to you on your federal return?

    • A. Yes, all of it
    • B. Generally no
    • C. Only the part above $10,000
    • D. Yes, at the bonus rate

  2. You get a $10,000 windfall and set aside 5% for fun. How much is left for debt and saving?

    • A. $9,000
    • B. $9,950
    • C. $9,500
    • D. $5,000

  3. Which usually comes first after the fun slice?

    • A. Paying off credit card debt
    • B. Buying individual stocks
    • C. A bigger car
    • D. Lending to a friend

Your turn

Open a separate insured savings account and move the windfall into it. Write down your debts with their rates and your monthly essentials, and put a date 30 days out on your calendar to decide.

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Answer key

What to do with a windfall

Work it out

  1. Inheritance$20,000
  2. Fun money (10%)− $2,000
  3. Pay off credit card− $4,500
  4. Emergency fund to 3 months− $6,500
  5. Left to invest= $7,000
  6. Card interest avoided at $150/mo$2,441
  1. Fun money is $20,000 × 10% = $2,000. Paying $150 a month, the card would take 47 months and $2,441 of interest. He pays off all $4,500 instead.
  2. Three months of essentials is $2,500 × 3 = $7,500. He has $1,000, so he adds $7,500 − $1,000 = $6,500.
  3. That leaves $20,000 − $2,000 − $4,500 − $6,500 = $7,000, which fits within one year's IRA limit.

Check yourself

  1. B. Generally no The IRS generally doesn't treat an inheritance as income to the person who receives it. Selling inherited property or withdrawing from an inherited IRA can be taxed.
  2. C. $9,500 $10,000 × 5% = $500 for fun, so $10,000 − $500 = $9,500 goes to the plan.
  3. A. Paying off credit card debt Paying off a high-interest card saves that interest with no risk, so it usually comes before investing.