Coming into money might seem like a good thing. But financial windfalls can come in many forms. You could win the lottery, but you could also inherit money during a difficult time of loss. With emotions high, making the right financial decisions can be hard, so our guide is here to help you decide what to do with your inheritance, or other financial windfalls.

If you’re wondering: “What should I do with my inheritance?” (or any lump sum), we’ve got you covered with hints and tips for dealing with tax obligations, saving and investing, and securing your financial legacy. Whether you want to buy a house, splash out on a dream holiday, or make your money work harder, let’s look at your options.

What is a financial windfall?

First, let’s explain what we mean by a financial windfall. Simply put, it’s getting your hands on a notable sum of money that you weren’t necessarily expecting. There’s no exact amount that defines a windfall, but it's any amount of money that might let you take action to improve your financial circumstances.

Financial windfalls can come from lots of different people and places. We’ve mentioned inheritance after the death of a family member. But it could also come from a redundancy payout or a work bonus. Either way, knowing what to do with a lump sum of money starts with thinking about your priorities and weighing up your options.

What to do with a lump sum of money

If you receive an inheritance — or come into a large amount of money — it can be tempting to go on a spending spree. But, in general, most of us would agree that the smarter decision is to hit pause and take time to think.  How could you use this money to improve your financial wellbeing?  Don’t rush, think about your situation, and consider some of the following  options:

1. Work out your tax liability

Nothing rains on a parade like tax obligations, right? But it’s important that you get them right before you do anything else with your money. You don’t want to turn a windfall into a debt.  It is possible to receive money tax-free, like gambling winnings, but inheritance over £325,000 is taxed at 40%. That’s a big chunk of money, so it’s a good idea to get a realistic total in your head before you fantasy-spend with money you don't have.

A great place to start is with a regulated financial advisor, because tax can be complicated. A professional who can cut through the noise can be really helpful. They may also be able to offer bespoke ideas for what to do with a financial windfall. Understanding your tax liability can significantly reframe how much money you have to play with. 

2. Update your will

While thinking about what to do with inheritance money, something to consider is your own estate. You might want to update your will to make sure that your new wealth is given to the right people when the time comes. 

You may also want to make gifts to your loved ones through trusts or direct payments during your lifetime, to help them improve their financial situations. Depending on how much money you receive, you could help somebody get onto the property ladder, invest in their business or give some money to charity. 

3. Pay off debts

It may not be the most glamorous thing to do with your inheritance. But paying off your debts can help to lift a weight off your shoulders and boost your saving power. Whether paying off your mortgage, clearing credit card repayments or clearing loans, tackling your debts can level the playing field and boost your credit score.

The interest you pay on your debts is normally far greater than the interest you earn on your savings, so paying off your debts can give your finances a real boost.

4. Save your money

If you’ve paid off any tax and cleared your debts, you might now be in a position to do something to help grow your windfall. Saving money can be a great way to balance your finances, improve your financial wellbeing and build for the future. There are several ways that you approach savings, so let’s look at some of them.  

Something that you might want to consider is an emergency fund. Generally speaking, it’s a savings pot of anywhere between three to six months of your regular income to cover any unexpected expenses. Whether it’s medical bills, property repairs, or periods of unemployment, having a financial buffer can relieve financial anxiety.

You can also stow your windfall away in a savings account where it can accrue interest and grow over time. There are lots of different types of savings accounts, but you’ll often find that you can earn greater interest rates when you lock your money away for longer periods and don’t require frequent access.

Alternatively, saving with certain ISAs (individual savings accounts) can provide you with tax-free interest. ISAs can be a great way to save towards large purchases, like buying a house. You can also set up junior ISAs, which can’t be accessed until a child turns 18 so that you can save towards their future.

4. Invest your money

Saving money can offer some good returns in the form of interest, but investing your money has the potential to make it work much harder for you. There’s no reason that you should consider your lump sum of money to be a fixed total. You can also see it as an opportunity to make more. That’s where investing comes in.

There are a lot of different options for investing your money, from stocks and shares to fine wines and rare football cards. But if you have a decent appetite for risk, you can realise some fantastic returns beyond inflation rates. However, it’s important not to invest more money than you’re willing to lose.

Investing always carries a level of risk, and you could end up with less than you initially invested, or even lose it all. To have the best chance of making decent returns, you may also need patience. It can take at least five years for investments to bear fruit, or if you do lose money it can take a while to rebuild.

To minimise risk when investing, it’s advised that you diversify and spread your investment portfolio, rather than putting all of your eggs in one basket. Perhaps even split your windfall in two, half for savings and half for investments? If you’re unsure, it’s often sensible to speak to a financial advisor before you dive into investments.

Managing a financial windfall

The stress of knowing what to do with a windfall of money can overshadow any positivity that comes from being given a financial opportunity. Remember to take a deep breath and don’t rush into any decisions. Getting money can be exciting, but a clear head will help you to make the right choices.