Managing a windfall, large or small

CI Assante Wealth Management |

It’s a challenge no one minds facing: determining what to do if a lump sum comes your way. With a smaller windfall, the decision often focuses exclusively on how to use the money. A larger windfall brings larger issues into play.

Bonuses, tax refunds and more

Some of the smaller windfalls may seem like found money, swaying you to spend it freely. But often these lump sums aren’t free money at all. An annual bonus, for example, isn’t all that different from your paycheques—it’s taxable income. A tax refund is your own money that the government owes you.

A smaller windfall can be a chance to get ahead in your financial life. Perhaps you could start or add to an emergency fund, or invest the funds in your non-registered account.

Many options are available to magnify the effect of the windfall. Paying down a credit card balance also erases the ongoing interest costs. Making a Registered Education Savings Program (RESP) contribution may trigger the Canada Education Savings Grant (CESG). Contributing to your Registered Retirement Savings Plan (RRSP) generates a tax deduction. If you give funds to your spouse or child that they contribute to their Tax-Free Savings Account (TFSA), you can benefit from income-splitting.

Large windfalls

You don’t need to win the lottery to receive a large lump sum. A windfall could arrive as an inheritance, insurance proceeds, a divorce settlement, a sale of property or from another source.

When you receive a large windfall, it’s usually best to “park and plan.” Place the funds in investments that will earn interest while remaining easily accessible. Then take your time to plan, because rushing to decisions can lead to regret down the road. Weigh all your options, whether they include paying down your debt or mortgage, purchasing a vacation property, investing for retirement or meeting any other financial goal. In some cases, a windfall can even change an individual’s life plans. For example, someone might launch a business they’ve always dreamed of, or a couple might retire earlier.

When it comes to investing a large lump sum, you’ll need to determine whether you should invest it all at once or periodically in smaller amounts. There are pros and cons to each choice, so it’s a decision to make with your advisor.

Another decision is how to invest the windfall. Some people follow their regular asset allocation, while others focus on capital preservation.

A windfall could also affect your estate plan. You may need to update your will if the windfall affects charitable giving or inheritances for your beneficiaries.

If a windfall should come your way, let us know. We’ll help ensure you’re using the funds in the best way to meet your financial needs and life goals.