Money Changes Everything

It's not every day that cash drops in your lap. Three financial wizards help three newly affluent women make the most of their windfalls

by Kate Ashford
windfall money from sky
Photograph: Photo courtesy of Karen Struthers/

Underestimate any future earnings
Typically, the type of person who starts a small business is pretty optimistic, especially regarding the money she'll be pulling in. When Susan predicts what she's going to make, she should start with a conservative number, then cut it in half. That way, if business isn't up to the level she expected, she won't have to dip into her reserves.

Get a grip on taxes
With large lump-sum payments, such as Susan's severance package, “You don't want to get to the end of the year and find out there's a tax liability you didn't expect,” Porter says. Susan should talk to an accountant now to know what she'll owe.

CFP, CCP Inc. Financial Planning Services, Palatine, Illinois

Exercise the options early
Susan's stock options aren't all due to expire until 2011, but her income will likely be pretty small until she gets her business established. So it's probably in her best tax interest to exercise the majority of the options in the next two to three years, even if the stock is off its high. That way, the stock options will make up the majority of her income while she's in a lower tax bracket.

Identify needs versus wants
As Susan pares down her expenses, it will help to identify the fixed outlays and the nonessentials. Providing financial support to her parents isn't optional, but putting money toward her grandchildren's college fund could wait.

Real estate paying off
Springfield, Virginia

Her windfall: $60,000

Where she got it: Her condo appreciated

Her goals: Buy a single-family home, save for retirement and pay off student loans

About three years ago, Laura bought a one-bedroom condo for $110,000 and then watched, bemused, as the value quickly shot up to more than $200,000. “It was really fun to see the price just keep going up and up and up,” she says. Now married and five years out of law school, she lives with her husband in a two-bedroom condo and has been renting out her other place. Laura figures that even with the equity loan she took out on the one-bedroom (which she used to pay off debt), she could clear some $60,000 if she sold it. She and her husband would like to buy a house, but she's afraid of getting burned in today's volatile real estate market. “I don't want to put everything I own into things that could lose value,” Laura says. And since her rental property is hers alone (premarriage), she'd like to put those proceeds toward something personal.



Stuff more into retirement
Laura is currently maxing out her 401(k) contributions, but with a current balance of only about $22,000, she's got a ways to go. In addition to her 401(k), she should put $4,000 into an IRA for both the 2007 and 2008 tax years. (A Roth IRA would be better, but she and her husband make more than the $166,000 cutoff to qualify.)

Pretend to have a bigger mortgage
A single-family home in her area will run Laura and her husband a great deal more than the two-bedroom condo. They should start putting an extra $600 or $700 into savings each month to simulate higher mortgage payments, help them trim expenses and fund the down payment.

Set up an investment fund
After starting an emergency account, paying off her student loans and funding a couple of IRAs, Laura will have enough left to put into an investment portfolio. “She could set up an account,” Sandra says. “Something low risk and with as much return as she can get on it.”


Don't let the housing market scare you
Laura may get less if she sells the condo, but she and her husband will likely realize those savings on the house they buy.

Compare the condo to a stock
To help her make the sell-or-keep decision, Laura should figure out which investment would make her more money—stocks and bonds, which, with the right mix, typically return nine to 10 percent a year, or the condo market in northern Virginia. If real estate is stagnant, it may be time to sell and put the money to work elsewhere.


First Published February 6, 2008

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