Don’t Make These 10 Common Financial Mistakes

If I came into alot of money – I would spend it on my house, a new car, a holiday or should I?

f you receive an unexpected cash windfall, you may be tempted to rush out and spend the money on something you’ve always wanted. In certain circumstances, it may be fine to splurge a little bit, but before you do so, it’s important to consider all the potential benefits—and consequences—of an unexpected infusion of cash, including tax implications, asset appreciation and how it could impact your long-term financial goals.

So what factors is it essential to consider before deciding how you’ll leverage a surprise cash windfall? Below, 10 Forbes Finance Council members share some of the most common mistakes people make when they receive an influx of cash and what they should consider doing instead.

1. Financing Something That Does Not Appreciate

Some people do impetuous things with unexpected windfalls. I had a client who won a new truck in a raffle. Rather than sell the truck and invest the cash, he traded it in for a BMW and financed another $40,000. Instead of a windfall, he took on the liability of a depreciating asset. I discourage financing anything that does not appreciate. If he had invested in stocks instead, he would have reaped five times that amount since. – Gil Baumgarten, Segment Wealth Management

2. Spending It Right Away

Keep an unexpected windfall in cash for a period of six to 12 months, whether it’s in a bank savings account or a money market fund. Even though these are currently offering very low interest rates, the liquidity and ready availability of cash to cover an inevitable unexpected expense (such as a corresponding tax bill) will be very welcome. – Ivan Illan, Aligne Wealth Preservation & Insurance Services, LLC

3. Overlooking Potential Tax Obligations

While there is a litany of reasons why you shouldn’t spend unexpected cash, one of the most important is taxes. You don’t know what your tax exposure is for this additional cash, and if you spend it all, you could end up in a situation where you can’t pay your tax bill. Talk to your tax accountant and get an estimate of what to set aside for potential taxes before you start spending anything. – Aaron Spool, Eventus Advisory Group, LLC

4. Immediately Buying An Item You’ve Always Wanted

One big mistake is to change your spending lifestyle by treating that unexpected cash windfall like a large bonus. It is tempting to use it for an item that it would have taken time to save for. A better choice is to invest it for the future. If you have not yet succeeded in creating an emergency fund, this may be a good way to start it. You may like the peace of mind it can bring to your financial situation. – Dave Sackett, Visibility Corporation

5. Paying Off Mortgages Or Other Debts

I often see people using large windfalls to pay off mortgages and other large debts. The intention is to eliminate debt and invest the money saved on their monthly payments afterward. But what actually happens is human nature takes over: Rather than investing, they incur new debt, increasing their lifestyle spending. Therefore, it’s often better to invest the money and continue making payments on debts. – Justin Goodbread, WealthSource Partners, LLC

6. Not Using A Small Amount To Celebrate With

I’ve always moved any unexpected cash into savings, whether personally or professionally. I’d recommend taking a small portion (10%) to celebrate and to share with those who helped you achieve that success. It’s important to save for a rainy day, and you’ll be glad you did, but celebrating is important so you can remember the sunny days too! – Julie Fergerson, MRC / Merchant Risk Council

7. Spending It All At Once

It’s human nature to celebrate an unexpected cash windfall. There’s nothing wrong with a little celebration, but the biggest mistake that people make is to spend it all. The “I’m rich” feeling can be a euphoric one, but the best thing to do is to save a significant portion of the cash and invest it wisely. You won’t be rich for long if you spend it all. – Sonya Thadhani Mughal, Bailard, Inc.

8. Changing Overall Spending Habits

The most common mistake people make with a surprise cash influx is changing their spending habits, based on the thought that this new income will continue indefinitely. Unexpected cash should be treated as a one-time thing. It can be used for anything from starting a new savings account to taking a vacation or making that large purchase you’ve been holding off on. But don’t use it to go into debt or offset your normal spending. – Joseph Orseno, Tiltify

9. Not Carefully Considering A Windfall Of More Than 1% Of Your Income

Any windfall that is less than 1% of your annual expected income is a blip on the radar screen of your financial plan—have fun with it. Anything over 1% should be carefully considered: Should you pay down debt, invest, buy real property or something else? These questions are best answered in consultation with a financial advisor who knows you, your goals and your family. – Todd Sixt, Strait & Sound Wealth Management LLC

10. Not Considering Immediate And Upcoming Financial Needs

When receiving a windfall, people’s biggest mistake is spending the money right away. Take the time to look at your immediate and medium-range financial needs. While it might make sense to pay down debt, it might be better to use the money to pay for needed equipment upgrades or looming tax payments. And use a little to treat yourself to a nice dinner—it’s a bonus, and you’ve earned it. – Jared Weitz, United Capital Source Inc.