Receiving a financial windfall is often a life-changing event. It's a relatively common one, too. You might never win the lottery, but the odds are that at some point you'll receive a significant amount of money, perhaps from an inheritance, bonus, insurance settlement or the sale of a home or business. If so, would you be prepared for the financial decisions you might suddenly face?
Proceed with caution
The first thing you will want to do after receiving a large sum of money is to take a deep breath. You may feel the urge to spend, invest, move, quit your job or give to others. But if you want your windfall to last, don't do anything until you have had a chance to come to terms with the personal and financial consequences. Regrettably, some people who suddenly come into money lose it all within a few years because they fail to plan. Taking the time to make well-thought-out financial decisions will help ensure that your money will last.
Put your money somewhere temporarily
Until you have had time to explore your options, there's nothing wrong with putting a lump sum into a relatively liquid account, such as a savings or money market account. You do not have to leave it there forever - just set it aside until you have had time to formulate a plan.
Assemble a support team
Because your finances are likely going to be a lot more complex now, one of the first things you should do is to get unbiased advice from a financial professional who can help you put together a financial plan. You may also need to work with an accountant, an attorney or an insurance professional who can help address any tax, estate planning or insurance planning concerns. Although receiving a windfall should be a happy event, it is sometimes very stressful, and you may need help from trusted professionals to help you handle the pressure.
Avoid spending and giving impulsively
Spend or give your money away too quickly and you risk depleting your nest egg. Although it is tempting to go out and buy something you have always wanted but couldn't afford before, watch your spending. A financial windfall can turn even a financially conservative person into an impulsive shopper. If your ultimate goal is to create lasting wealth, take time to consider your future needs, not just what you need and want today.
What about giving or loaning money to family and friends, or making a charitable donation? Again, it is best to wait until you have set priorities and developed a financial plan. Otherwise, your personal relationships could suffer, and your generosity might have unintended consequences (e.g., being approached by dozens of charities after donating to one).
Watch out for too-good-to-be-true opportunities
Unfortunately, more than one person has become the target of unscrupulous individuals looking to profit from the good fortune of others. And even if you are approached by a well-meaning friend, family member or business associate, you should thoroughly investigate any investment or business opportunities presented, instead of relying on someone else's judgment. If you have trouble saying no, consider referring any requests you receive to a third party, such as an attorney or financial professional you are working with.
Look at your financial needs and goals
An important part of handling a financial windfall is evaluating your short- and long-term needs and goals. This will serve as a foundation for your financial plan.
- Do you have enough money set aside in an emergency account?
- Do you have outstanding debt that you would like to pay off?
- Do you plan to pay for your children's education?
- Do you need to bolster your retirement savings?
- Are you planning to buy a first or second home?
- Would you like to quit your job or go into business for yourself?
- Are you considering giving or loaning money to loved ones or donating to a favorite charity?
- What would you like to accomplish with your wealth over time?
Have a little fun
Once you have made some initial decisions and set aside money needed to pay taxes, consider spending a small portion of your windfall on something you would like. There is no reason to deprive yourself, as long as you have taken care of business first. If you plan well and control the urge to spend lavishly, your windfall may provide you with financial security and comfort for many years to come.
The Certified Financial Planners at New Wealth Advisors are experienced in guiding clients toward setting and attaining their financial goals.