Before you splurge, take time to consider all the financial angles and come up with a solid plan. August 6, 2012 Figuring out how to manage a windfall sounds like the kind of problem we’d all like to have. Sadly, though, an unexpected payout—whether from an inheritance, a lawsuit settlement or a lucky lottery ticket—can create a world of problems. Shady financial advisers may shower you with dubious investment schemes. Long-lost relatives could reappear with hard-luck stories. You might be tempted to quit your job, buy a more expensive house or make other costly decisions that could make your jackpot quickly disappear.SEE ALSO: How to Find a Money Therapist Many people view a windfall as "found money" and treat it differently than money they've earned, says William Hammer, a certified financial planner in Melville, N.Y. They're much more likely to use it in a way they'd regret, he says. Most financial planners advise waiting six months to a year before you do anything with your windfall. During that period, stash the money in a safe place that allows you easy access, such as a money market fund or online bank savings account. You won't earn much interest, but you'll give yourself time to come up with a solid plan for how you'll use the money. If a loved one left you an inheritance, this will also give you time to grieve before you make any big moves. Advertisement "Most of the mistakes I see when people inherit money happen when they put the money to use too quickly," Hammer says. Assemble your financial team. If you're unaccustomed to dealing with a large amount of money, you'll need to put together a group of advisers who can help you get the most from your good fortune. Usually, your team should include a financial planner and a certified public accountant, says Mitch Brill, a certified financial planner with MassMutual Financial Group. Depending on your circumstances, you may also need assistance from a lawyer and an insurance professional, he says (see Build Your Financial Dream Team). Jessica Clark, 40, says her dream team included her longtime financial adviser and a financial coach who acts as the chief financial officer for her small consulting business, Room to Breathe. Clark knew she was going to receive an inheritance long before her grandmother died in 2010, and that gave her plenty of time to plan. When she received the money last October, she had a strategy laid out on an Excel spreadsheet. "It was important for me to have a plan for what to do with that money before it even came into my hot little hands," she says. Don't ignore taxes. Some windfalls, such as an insurance payout, are tax-free. But in other cases you'll have to hand over some of your money to the IRS. A large estate could be subject to federal and state estate taxes. An inherited trust could also lead to tax headaches, Hammer says. Advertisement Even modest inheritances can cause tax problems if they include a tax-deferred retirement plan. For example, if you were to cash out an inherited individual retirement account, you could owe taxes on the entire amount, which could push you into a higher tax bracket. There are ways around the problem. Spouses can avoid a tax bill by rolling an inherited IRA into their own retirement account. Children and other heirs don't have that option, but they may lower the tax hit by taking annual withdrawals based on their life expectancy. The best strategy is a very individual thing, Hammer says. "That's when you need tax advice." Don't quit your day job. Windfall recipients who call it quits often underestimate how much money they'll need to replace their income, Hammer says. If you make $50,000 a year, he says, you'll need to invest anywhere from $1 million to $1.5 million to earn enough to replace that income, depending on how old you are. And once you quit your job, you'll stop earning income that contributes to your Social Security retirement benefits—which you may need if your investments turn sour. Brill recently advised a 54-year-old woman whose husband had died of cancer and left her a life insurance payout of $3 million. That's a sizable policy, but she'll need to make the money last for the rest of her life, he says. She also has a child in college and another who is a junior in high school. "We're taking it very slowly to make sure she understands what she needs to do," he says. Advertisement Similarly, thousands of General Motors retirees and their spouses were recently offered a lump-sum payment in lieu of a monthly pension check. Some retirees stand to receive more than $300,000, but the money will need to last 20 years or more. In addition, retirees who accept the lump sum will have to take on the responsibility—and risk—of investing the money, which isn't the case with a traditional pension. Invest in yourself. It's tempting to use your windfall to start a business, retire your mortgage or pay off your kids' student loans. But before you spend any money, make sure your financial house is in order. Do you have credit card debt? Paying it off will give you an immediate return of whatever interest rate you pay on the balance. How much money is in your rainy-day fund? You should have from six months' to a year's worth of living expenses in case you lose your job. Next, look at ways the money could help your career. Are you one year shy of a four-year undergraduate degree? Would going to school at night to get your MBA lead to a promotion? "Job security alone is worth a lot of money," Hammer says. "It's probably the best investment you can make." Finally, take a hard look at your retirement accounts. Even if you've saved enough for retirement (and most of us haven't), increasing your retirement savings will boost the amount of income you'll have to live on when you retire. You can invest more conservatively because you won't need high returns, which require you to take more risk, to reach your savings goal. Advertisement Splurge a little. A small indulgence could reduce the chance that you'll blow your entire windfall, Brill says. Even here, though, you should have a plan. For example, you could decide that you'll spend 2% of your inheritance on a trip you've always wanted to take. That's what Jessica Clark did. Her spreadsheet included an account for her long-term savings, one for emergencies and one designated just for fun. In January, she and her husband used money from the fun account to pay for a vacation at Canyon Ranch Resort & Spa, in Tucson, Ariz. The couple married in 2010, but because they're both business owners they had never taken a honeymoon. Clark says she has avoided other temptations by thinking about what her grandmother would have wanted. "I wanted to honor her," she says. Other beneficiaries would do well to follow Clark's example, Hammer says. "Look at it as a responsibility," he says. Before blowing your legacy, ask yourself, If Mom and Dad or Grandpa or Grandma were next to me right now, would they want me to blindly spend it on silly things? This article first appeared in Kiplinger's Personal Finance magazine. For more help with your personal finances and investments, please subscribe to the magazine. It might be the best investment you ever make.