Managing a financial windfall
This post was written by our friend at The Boomer Club.
Finding out you received a financial windfall is exciting. Odds are at some point you’ll likely receive a sudden influx of money.
Windfalls can come from lots of different sources: inheritance, divorce settlement, insurance proceeds, sale of small business, severance or retirement package and even a lottery win.
It may seem like a problem you’d love to have—it can be life-changing, but deciding what to do can be a bit overwhelming.
So now what? You may feel the urge to spend, invest, move, quit your job, or give to others. Of course, you want to celebrate. But, if you want your windfall to last, you need to take the time to make well thought out decisions. Don’t do anything rash.
Don’t be hasty
Woohoo! Free money! Even a small amount can make you feel like you can do (and buy) anything.
Whether it’s a large or small sum, expected or unexpected, you won’t believe how easy it is to blow through money if you’re not being vigilant.
Studies have shown that most people who get a financial windfall spend the entire amount within five years.
It can be emotional
Depending on where the money comes from, a lot of emotions can be attached to this sudden wealth.
If your windfall came from an inheritance, it means the death of someone important in your life. Insurance settlements are also associated with periods of high stress such as death, accident, or housing disaster. Divorce means the loss of an important relationship. You may be bewildered by grief and indecision.
Often people can’t bear to touch the money. They say things like, “It’s for the kids,” or “My mom was a very frugal, conservative saver, I don’t want to jeopardize the money.”
If you receive a large amount, investment salespeople will become your new best friends – watch out for too-good-to-be-true opportunities. The people you hang out with may change. Don’t be surprised if friends and relatives start hitting you up for loans. This is when long-lost cousin Johnny pops out of the woodwork with an awesome business idea or need help with over-the-top debts.
A retired northern B.C woman who recently won $10-million stated she “can’t wait to share the life-changing money” with her children and paying off her grandchildren’s student loans and helping them buy a house.
This is admirable but make some judgement calls about the effect such a gift might have on their motivation in life and their relationships.
You may be perfectly willing to invest, give money to family and friends, or donate to charity, but this is not the time to take big steps, even if people pressure you. You need to just park the money until you can think clearly and prioritize your wish list.
Assemble your team
A windfall can radically change your financial situation. Consider working with a team of professionals. If it’s a large sum you’re going to need the following:
1. A financial adviser –Your adviser can help you walk through issues of spending, debt repayment, investing and planning for the future and charitable giving, and determine what makes the most sense for you. They’ll make sure you don’t burn through all of your money.
CI Direct Investing clients get access to unlimited financial planning from a financial adviser.
2. A tax specialist – You need to understand what taxes you will pay and whether there are any strategies you can use to lower the bill. You’ll likely be pushed into a higher tax bracket.
3. An estate planning lawyer – A lawyer will update your estate plan, can put trusts into place that minimize estate taxes, and structure charitable bequests.
Consider all possibilities
What you end up doing with your lump-sum is largely dependent on your specific financial situation. As you weigh your options, consider:
- Paying off high interest debts.
- Creating an emergency fund if you don’t already have one.
- Re-evaluating your retirement income plan.
- Revisiting your investment plan. Your windfall may mean changes to your investment goals or risk tolerance.
- Give your retirement bucket list a new look. You may be able to splurge a bit and treat yourself and your family to something special. A winter vacation home or retirement home in a different location may be new possibilities if they make financial sense.
Can you finally take that job and shove it? It really depends on the size of your windfall, your age, your current portfolio, and your spending needs.
Another recent B.C. lottery winner ($7 million) who’s 58 says he has no plans to leave his job as a janitor.
You might like the social and professional interaction at your workplace, but be aware that if your large windfall becomes known it can make it very uncomfortable for you to continue in your present job.
The bottom line
Many of us dream of receiving a large windfall in hope that it would allow us more financial freedom to indulge in a life of luxury. Whether it’s a family inheritance, a sizeable work settlement or lottery win, don’t expect your windfall to magically turn your life around. However, whatever you do will impact your financial life and your goals.
As always, balancing today’s wants with tomorrow’s needs takes a little thought and some planning. You want to view this sudden lump sum as seed money to sustain and grow your wealth.
Don’t let irrational exuberance get the better of you so you end up back where you were, or worse.
Still not sure what to do with your newfound wealth? CI Direct Investing’s advisers can help you understand your options. Book a call with them today.