If you suddenly find yourself a little or a lot wealthier, it can be both exciting and overwhelming. Receiving an unexpected amount of money can provide you with an opportunity to align your next steps with your financial priorities.
On this page you’ll find
What’s a windfall?
A windfall is an unexpected financial gain. There are many reasons why you might receive a windfall. For example, you could get a bonus at work, receive an inheritance or financial settlement, or win the lottery.
Receiving an unexpected amount of money can be a significant boost. It may be appealing to spend the money as quickly as it arrives. But no matter the cause of your windfall, it’s a good idea to pause. Make sure your next steps — including any spending decisions — align with your financial priorities. This can include your financial plan, life goals, debt repayments, tax considerations and more.
You might be someone who carefully spends your paycheques but be more spontaneous with how you spend a bonus. This an example of mental accounting, when we treat money differently depending on how or when we receive it. It can significantly affect how we choose to spend, save and invest.
How to check in on your financial plan
A financial windfall creates a valuable opportunity. But it can also come with stress, or pressure to manage the money in the right way.
A helpful first step is to check in on your financial plan to remind yourself of your priorities. If you don’t have a financial plan, you can create one.
A financial plan can start with making a list of your goals, and then ranking them in order of importance. This could include goals like saving for retirement, paying down a mortgage or other large debt, or saving money to start a business.
Once you’re clear on your priorities, you can put your windfall to work for you. You could use it to pay down debt, save, invest, donate or spend on a major purchase. You could also divide the money between a few of these options.
A financial plan can start with deciding what your financial goals are, and how soon you want to reach them. Learn more about making a financial plan.
How paying down debt could help you
The choice of whether to pay down debt or invest will likely depend on the size of your debt, and how high the interest is. There are different approaches to paying down debt, you could:
- Focus on the debt with the highest interest rate. If you have a lot of high-interest debt, using your windfall to pay that debt off sooner could be a big help. This is because high interest debt is likely to accumulate faster than the return you’d earn from an investment. This might be a good choice for you if the added financial freedom of being debt-free will help you in the future. Once that debt has been significantly reduced or eliminated, you’ll increase your monthly cash flow which can help you reach your financial goals faster.
- Focus on a debt you can reduce significantly by dollar amount. This involves making a large payment against one of your debts that you can eliminate or reduce by a significant amount. This may be helpful if you have debts that you are closer to paying down completely but need a larger amount than you’d usually pay monthly. This approach could be helpful if it would reduce the costs of repaying the debt over time, or if it would bring you peace of mind to pay it down faster. This could involve making a significant payment against the principal of a mortgage, a car loan, or a debt repayment plan.
If you’re not sure what solution is right for you, consider speaking with a debt management professional, or your registered financial advisor.
Paying down debt could help your credit score and credit report. Learn more about how to check your credit report.
When saving money might be a good choice
If your debt management is under control, then saving is another option for your windfall. If you have financial goals that you want to act on in the next couple of years, then your windfall could help. This could include things like a home renovation, major purchase, or perhaps a dream vacation.
You could also use the windfall money to top up — or start — an emergency fund. This can help you be prepared for life’s unexpected events. A common rule of thumb is to put aside an amount equal to three to six months’ worth of expenses in an account that you can access easily if you need the money.
There are a few ways you can save, which might involve using a dedicated savings account or other short-term financial products. These types of accounts help keep your money accessible while it grows. Saving is a lower risk approach than investing, but any interest you earn may not keep up with inflation. It will also likely provide lower returns than you could get from investing. For this reason, saving is ideal for short-term goals.
Reasons to consider investing your windfall
Depending on the time horizon for when you plan to use the money, it might make sense to invest your windfall. Investing can help you achieve goals like saving for retirement, education, or buying a home. And the earlier you put aside money towards your goals, the more time your investment returns have to compound and grow.
Investing your money can help you reach your long-term financial goals. It has the potential for higher rewards than saving but it also often comes with higher risks.
The account you hold your investments in depends on your goals. Some accounts are tax-sheltered with different annual contribution limits. Choose the account that best matches your goals and how much contribution room you have. You could also work with a registered financial advisor to help you plan where and when to contribute based on your goals and tax situation. Consider the following options:
- If you want to invest tax-free for any goal, a Tax-Free Savings Account (TFSA) is a flexible option. A TFSA can hold either savings or investments, or both. It is tax-sheltered, which means your savings and investments grow tax-free and any money you take out is not taxed. TFSAs have an annual contribution limit. If you don’t contribute the full amount each year, you can carry forward the unused amounts.
- If you’re saving for a home, the First Home Savings Account (FHSA) may be right for you. The FHSA can hold savings or investments, or both. There are annual contribution limits, so check your contribution room before deciding if or how much to contribute from your windfall.
- If your main goal is to save for retirement, then you might consider using — or opening — a Registered Retirement Savings Plan (RRSP). It is designed to help you save for retirement. Along with saving for retirement, RRSPs have special tax advantages. Like other registered savings plans, RRSPs can hold savings deposits and investments. If you already have an RRSP, check your annual contribution room on your most recent notice of assessment.
- If your goal is to save for a child’s education, you might consider contributing to a Registered Education Savings Plan (RESP). Like other tax-sheltered accounts, RESPs can hold savings deposits or investments, and your money grows tax-free while in the account. In addition, the government matches your contributions with additional grants. The recipient of the RESP can put the funds toward qualifying post-secondary educational programs including university, college, or other designated educational institutions.
These four accounts are tax-sheltered investing accounts that are available in Canada. That means you won’t owe tax on the money you invest or save, while the money stays in the account.
Saving and investing can help you reach different goals. Having money in a savings account can help you be ready when emergency needs arise, or to plan for short-term goals. Investing can be a better match for longer-term goals that offer potential for higher growth. Find out more about different types of investing accounts.
What are the tax implications of a windfall?
If your financial picture significantly changes because of a windfall, it’s usually a good idea to consider whether your tax situation will change too. There are two main questions to ask yourself:
- Is the money a type of windfall that is considered taxable?
- Are you investing the windfall in a way that would create taxable earnings?
The Canada Revenue Agency (CRA) defines a windfall as an unexpected payment. Whether the windfall is taxable depends on what kind it is. Gifts aren’t typically taxed in Canada. But there are some exceptions, including a gift from a boss or employer, which is classified by the CRA as a taxable bonus. Cash awards or gift cards are considered taxable employment benefits. They’re viewed as income, and you need to report them when you file your taxes.
By contrast, some large amounts are considered non-taxable, including most gifts and inheritances, and lottery winnings. Learn more about amounts that are not taxed.
If you invest the windfall money, you may pay tax on the investment earnings. This depends on how and where you invest it. For example, if you win the lottery, you won’t be taxed on the money you receive. However, if you invest some of that money in a non-registered investing account, then your earnings would be considered taxable income. Similarly, if you place the funds in a savings account, any interest earned will be taxable. However, if you decide to save or invest in a tax-sheltered account, the money could grow tax-free while it stays in the account.
What if you need help managing the extra funds?
If you’re dealing with managing a windfall and you haven’t worked with a financial advisor before, this may be an opportunity to start. Finding the right person (or people) to help you manage your windfall can make all the difference. A registered financial advisor can help you with a range of financial matters, including:
- Planning for multiple investing goals at once.
- Helping to plan whether to maximize your account contributions, based on your goals and your tax situation.
- Creating a financial plan to pay down debt, invest, and save.
- Advising on savings strategies and managing your household budget.
- Consulting on types of insurance that may be helpful.
- Preparing for tax time.
You can meet with more than one potential advisor before deciding who to work with. Learn more about how to choose a financial advisor.
Summary
A windfall is an unexpected payment of a large amount of money, such as a work bonus, inheritance, or lottery win. If you suddenly receive a windfall, it’s a good idea to think about:
- Your financial goals – To help you decide where to target the money.
- Your debts – Does it makes sense to pay down what you owe, particularly high interest debt?
- Saving and/or investing – For either short-term or long-term goals.
- Tax implications – Most windfalls aren’t taxable, but the interest earned on them is.
- If you need a registered financial advisor – To help you understand how to manage your money.
