Most of us dream of receiving an unexpected windfall, in hopes that it would allow us more financial freedom in our lives, whether to pay off our debts or to indulge in a life of luxury. But whether it’s a family inheritance, a sizeable work bonus or a major lottery win, an unexpected windfall is not a guarantee for an easy life in the absence of proper planning and investing.
It is estimated that approximately
70% of people
who receive a vast sum of money unexpectedly will squander it in only a few years, according to non-profit National Endowment for Financial Education. Lottery winners are the best example, with many cautionary
tales of squandered wealth
making the headlines in recent years.
A financial windfall is quite often a life-changing event, but the more important question is what to do with the money? You need to sit down and carefully think about what you are going to do with it before making any decisions. Remember, one or a series of even small bad moves can drastically affect you personally, emotionally, and financially.
There are people who won big-time through the lottery only to find themselves losing everything and becoming more indebted in just a couple of years. Please don’t think that what happened to them will never happen you, if you ever be in this position, because there’s always a possibility that it would happen. Again, never say never.
Don't Do Anything (Initially)
Some may look at an inheritance as a financial windfall like winning the lottery or hitting it big in the stock market. Getting and inheritance is a little different because it typically comes at a price of losing someone you love. When someone gets an inheritance, grief and other emotions can prevent that person from making sound decisions.
Pay Off Debt First
Paying off debts might be the best investment you make. Paying down a 6% debt has a pre-tax equivalent of over 9%. I don't know about many investments that can guarantee a pre-tax return of over 9%. Don't forget that paying off debts is a winning strategy.
Give 10% Of It Away
Giving to a cause close to your heart will benefit others and probably make you feel better about yourself. Some people who come into large sums of money feel guilty about their good fortune. Helping others is a good way to avoid this.
Giving to charity is also tax efficient.
If you leave 10 per cent of your net estate as a charitable legacy, you may qualify for a reduction in the rate of inheritance tax.
Wisely to one person is not wise to another so get more that one qualified financial advisor’s advice before making any decisions. There are just some common sense vehicles like rental properties, GIC’s, and maxing out your TFSA and RRSP every year.
Reduce risk by spreading out your contributions at regular intervals. A common approach might be to split the investment into four chunks which can be invested at regular intervals over between 12 and 18 months.
Don’t quit your job
Your first instinct might be to walk into your boss’ office and tell them to park it where the sun don’t shine. This is a bad idea for a lot of reasons. First, you never know if you might need that job again, or you might just miss working… I know that doesn’t sound right but you never know.
Keeping your job for a little while will also allow you to stay grounded and think about what this really means for you and your family.
Pretend you never got it
Why not :) While you may be tempted to spend that extra cash on something frivolous, it’s a much better idea to pretend it doesn’t exist and keep saving for your goals. Depending on how much your windfall is you might only have a few years of “hard work” left in your plan.
Keep it a secret
Try to keep your new found wealth to yourself for as long as possible, and if people find out try to keep the amount 100% to yourself. The moment you share a number, people start carving out their percentage.
Perhaps we’re being a little paranoid, but money makes people crazy. Unless a person is already part of your inner circle, or you’re paying a pro to manage your money and legal affairs, you need a force field to protect you from people who want what you have.
If your windfall is publicized (gambling winnings or settlements) you might need to get new phone numbers, unlist your address, change how you behave on social media and display general awareness that you are now a juicy target for telemarketers and get-rich-quick scammers looking to bleed you dry.
Imagine a guy from high school constantly begging you to dump money into his fizzling business. He just needs $500,000 and you have plenty to spare, right? You get the point. You don’t have to live in a bubble, but you do need to limit any unpleasantness from money-grubbing parasites.
Have Some Fun
No, seriously. Have some fun. Go nuts. Make memories. Just be sure you set a budget and don't spend more than you should. Financial advisers often recommend allocating five to 10 percent of your windfall for pleasure. Go ahead, buy shoes. Visit one of the world's great restaurants every year or take a family vacation. See the country. Sign up for some courses. In short, start working on your collective "bucket list." If you've planned adequately for the rest of your money, you don't need to feel guilty about enjoying yourself.
The Bottom Line
Some of the richest families in the world have had their vast fortunes squandered by future generations. Benefactors and heirs of lesser fortunes would do well to learn from their mistakes and those of other families with similar stories. A little planning, care and common sense can go a long way toward taking care of not only the second generation but perhaps the third, fourth and fifth generations as well.