Sudden windfall? What to do with that extra cash

For this week’s Reality Cheque column, we’re looking at the common myths around getting a lump sum of money.

You’ve probably dreamed about what it would be like to win the lottery or inherit a million bucks. Maybe you’ve fantasized about driving a Lexus LC 500 off the lot, buying an oceanfront cottage on Bowen Island, B.C., or rolling around on a bed covered in crisp $100 bills for the FYP. (You do you.) The reality of receiving a windfall—a large settlement, severance or life-insurance payment, prize, bequest, gift, sale proceeds or work bonus—can be exciting. But do you go after those fantasies or worry about stretching that newfound cash wisely?

“The knee-jerk reaction to any windfall is to splurge on fun,” says Shalini Dharna, CPA, and certified financial advisor in Mississauga, Ont. “While that may provide an immediate dopamine hit, it’s probably not the best choice in the long term. So, take a moment to pause, and avoid making emotional decisions.”

Take time to consider your short- and long-term objectives

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Before you sink dough into more house than you need or pay off your cousins’ debts, create or rework a budget that accounts for money in and out in the coming months. Plus, take time to consider your current situation, your hopes for the years ahead and your retirement goals.

“Receiving a windfall can be exciting, but it can also come with a lot of responsibility to ensure that it lasts,” explains Sandy Yong, a Toronto-based TEDX speaker and author of The Money Master. “It’s a good idea to establish your financial goals and figure out how you’ll allocate your money to help you achieve them faster.”

Dharna encourages her clients to ask themselves exploratory questions, such as “What will make life feel better today?” And “What will make life easier five or 10 years from now?”

Keep a low profile and be wary of scammers

Go ahead and share your good news, but only with your closest family and friends—after they’ve sworn to secrecy. Publicizing your recent payout can lead to unsolicited emails, calls or letters from fraudsters offering fake investment opportunities or posing as claimants to an estate, according to the Canadian Investment Regulatory Organization. Even if someone approaching you seems legit, avoid sharing any financial or personal information—from account numbers and passwords to your Social Insurance Number (SIN)—and contact the organization they claim to work for directly to verify their identity. Stay informed about emerging new scams, as well, and check your accounts regularly to look for errors or fraudulent transactions.

Differentiate problematic debt from strategic, low-interest loans

“Not all debt is ‘bad’ debt,” Dharna explains. Yes, paying down high-interest credit-card balances and loans will yield guaranteed financial returns, but continuing with mortgages or loans charging under about 5% may enable you to invest elsewhere. What’s right for you will depend on the specific interest rates involved and your cash flow, financial goals and comfort level. (A financial planner can offer advice if you’re uncertain.) “If the debt is causing you anxiety, then it should be addressed,” she adds.

Get support to process feelings and make informed decisions

Money comes with all sorts of feelings. In addition to the shock and glee, anxiety, fear, guilt, overwhelm and a desire to isolate oneself can also accompany a sudden influx of funds. Some folks may feel immediate pressure to help family members, while others freeze at the thought of making bad financial decisions.

“If the windfall came from a difficult event like a death, divorce, or insurance claim, there may also be grief attached to the money,” adds Dharna. “That emotional complexity can heavily influence spending decisions.”

Meeting with a therapist or social worker, as well as a financial expert, can help you get clarity on your emotions and objectives.

Vet strategies with a qualified financial professional

Outputs from ChatGPT or Claude or the get-richer schemes from a friend may not address your unique financial and tax situation, obligations or long-term needs. Their tips can be part of your initial research before consulting with a financial counsellor or planner, however.

“Financial advice is highly personal,” says Dharna, noting that AI responses can sometimes be inaccurate, as well. (Hello, hallucinations and outdated info on the internet.) “Two people with the exact same windfall may need completely different strategies, depending on debt levels, family circumstances, business ownership, taxes, retirement needs and their personality.”

A highly customized investment plan that takes your risk tolerance and life stage into consideration can help you multiply the value of your windfall and create additional income. You may want to ask about annuities, insurance and estate planning, as well.

Just be sure to allocate some money for immediate and long-term fun, so you don’t feel deprived and overspend later. “It’s important to give yourself permission to enjoy a small portion of your windfall,” says Yong. “Go on a family vacation or purchase something nice for yourself.”

Sock away funds and reduce tax owed

“In Canada, some windfalls like lottery winnings or gifts are generally tax-free,” says Dharna. “Others, such as bonuses, investment gains, inherited registered accounts, or the sale of a business or property, can create significant tax consequences. Many people make the mistake of spending the full amount before understanding what portion may ultimately belong to the CRA.”

Talk to an accountant or financial advisor to understand potential tax issues and ways to minimize tax owed, such as topping up one of your registered accounts to max out your contribution room, making charitable donations, and more.

Put money into an emergency fund

Life will always throw curveballs, even if you’ve struck it big. In addition to setting aside potential tax payments, keep the cash equivalent of three to six months of living expenses in a separate account you categorize as your emergency fund. That way you’re covered if unpredicted bills roll in or hardship hits. (Good advice for everyone, not just windfall winners.)

Focus on the joys that money can’t buy

Research suggests that lottery winners experience increased life satisfaction, but not necesarily more happiness or better mental health. Obsessively saving every dime of your windfall, blowing money on expensive restaurants or designer bags, or expecting money to buy you bliss are all recipes for potential discontent.

Investing in financial advice and your physical and mental well-being instead can offer peace of mind as you navigate the impacts of your windfall, helping you make choices that align with your values. Donations to important causes aren’t just tax deductible, for example. Psychologists say that people who give are happier and healthier, as are those who focus on relationships and doing meaningful things. Consider paying it forward with a donation to a community, charitable or non-profit organization that has touched your life or others, for instance. At the end of the day, your loved ones and the good you do in the world might be the best windfall of all.

Read more from this issue of The Get:

1. Friends with money: How income gaps quietly reshape relationships
2. Celia Sears on making the biggest bet on herself
3. Is premium economy worth it?
4. Where does my money go?