4 steps to protect a windfall By Marcia Passos Duffy • Bankrate.com
* Financial windfalls can disrupt lifestyles and relationships.
* It's best to leave money untouched while adjusting to new reality.
* One-year review of situation can help keep newly wealthy on track.
It may seem like a problem you'd love to have: Deciding what to do with a sudden inheritance from a long lost relative or a big win in the lottery.
But, as the sad tales of some lottery winners clearly demonstrate, sudden wealth could quickly spiral into a living nightmare -- with the loss of not only wealth, but also family, friends and even health.
If you're lucky enough to receive a windfall, understanding the psychology of sudden wealth can help you take the right steps to protect your money and lifestyle.,
"People think windfalls are about money. But it's really all about change and transition ... and people need time to adjust," says Susan Bradley, a Certified Financial Planner who is founder of The Sudden Money Institute in Palm Beach Gardens, Fla., and author of "Sudden Money: Managing a Financial Windfall."
Handling a windfall
Set aside play money.
Review after one year.
Money shock isn't necessarily limited to those who get millions suddenly deposited into their bank account.
In fact, unexpectedly getting as little as three months' worth of salary in one lump sum can set off a chain reaction of panic, guilt and fear for some, according to psychologist Dennis Pearne, co-author of "The Challenges of Wealth" and a wealth counselor and consultant based in Framingham, Mass.
"A person making $60,000 a year ... who suddenly has $15,000 plopped in their lap" can go into money shock, Pearne says.
Following are four steps that can help you adjust to a new financial reality after a windfall:
Step 1: Money moratorium
The shock of a sudden windfall can set off a litany of irrational behaviors, such as giving all the money away, becoming a recluse, spending the money lavishly, and hiding or hoarding the money. Other hallmarks of money shock include engaging in self-destructive and expensive activities such as drinking, using drugs, gambling and sex addiction, says Pearne.
Bradley says such problems stem from the fact that most people don't understand the limits of their new wealth, especially if the windfall is relatively large.
"(The money) can be seem infinite ... people often get an 'I'm invincible, anything is possible' feeling," she says.
These powerful emotions may create trouble for those with new wealth.
To counteract these emotions, it's important to allow time to adjust to the new wealth circumstances that follow a windfall. Pearne and Bradley recommend that people who receive a windfall do nothing with their money for at least a few months, if not an entire year.
That means saying "no" to gifts for family or friends, new investments, lavish cars or house purchases, and trips around the world. It's not even wise to retire.
"Park your money someplace safe where it won't depreciate and take a money holiday," Pearne says. She recommends CDs as one possible home for the new cash.
Bradley says the money moratorium acts as a timeout that allows you to come to grips with your new financial situation and get your emotions under control.
"Emotionally, a windfall results in a stress reaction," Bradley says. "When people are in that state, they are using their reptilian brain and are prone to react rather than respond."
Taking a breather from the excitement of getting a lot of money -- and knowing you don't have to make any decisions right away -- can help calm emotions and set the stage for better decision-making, Bradley says.
During the money moratorium, there is a lot of work that needs to be done. While the money is safely parked in CDs for six months to a year, start to assemble a team of advisers you trust, including a fee-based financial planner, an estate attorney, a money manager who has experience with high-net-worth individuals and an accountant, Bradley says.
"This is a time to discover, organize and explore," Bradley says.
Step 2: Emotional inventory
Sudden wealth can lead to what psychologist Pearne calls "identity dissolution." All the parameters set up in life -- which define identity -- are suddenly gone.
After an especially large windfall, traditional work may become an option rather than a necessity; all the years of school training to get to a skill level are no longer necessary for survival.
Social circles -- the people who you hang out with in your socioeconomic sphere -- may change. People also may come out of the woodwork looking for a handout, children may demand more money, and family members or friends may feel resentful or become predatory, he says.
"Everything a person has spent decades building changes in one fell swoop," Pearne says.
He says that in his practice, he notices that about half the people who attain sudden riches spiral into self-destructive behaviors.
"This is because the existential question 'Who am I?' has suddenly changed by light-years," Pearne says.
When a windfall is the result of the death of a family member, it is doubly confusing, Bradley says. Grieving heirs may also feel guilty at being secretly thrilled about the money.
Psychological problems can arise if friends and family are unsympathetic to the stresses of new wealth and cannot help them with this unusual dilemma. Unlike other types of major transitions -- such as divorce, a move or death of a loved one -- the transition into money is not something that is seen as a "problem" by society, Bradley says.
"One of the classic mistakes (is that people) underestimate the power of the experience and the degree of change that happens," says Bradley. "It can be very isolating, and that's confusing because our society tells us that this should be a good experience.
Pearne suggests therapy -- ideally with a professional who has experience in the psychology of sudden wealth -- to help resolve some of these issues.
Step 3: Set aside play money
The money moratorium mentioned in Step 1 can help you sort out exactly how you feel about the money, and what you'd like to do with the cash, says John David "J.D." Roth, editor at the Get Rich Slowly personal finance blog.
That can prevent one of the worst mistakes associated with windfalls, Roth says.
"The biggest mistake people make when receiving a windfall is spending the money without a plan," he says.
Roth should know. He received a small windfall from an inheritance in 1995 when he was in his 20s and deeply in debt.
"The smart thing (I should have done) was to pay off the debt ... but I went out and spent the money on a top-of-the-line computer and books," Roth says.
In just a few weeks, all the money was gone, Roth says. He has since turned his entire financial situation around, and now saves aggressively and lives debt-free.
However, people who reap a windfall shouldn't necessarily avoid treating themselves, Roth says.
He suggests setting aside a small percentage of the money and using it to spend any way you wish.
The amount should be small -- no more than 5 percent of the windfall total, he says -- and should not be spent until any debt and tax obligations are squared away.
Like Pearne, Roth suggests stashing the rest of the windfall into a CD for several months to let the excitement of being rich subside.
Step 4: Review after one year
Bradley documents three phases of sudden money in her book. She says the first phase encompasses a steep learning curve that can last for as long as five years, much like a grieving process.
"It is longer if the money was the result of the death of a loved one," Bradley says.
Although the adjustment to a windfall can take five years, it's wise to review your situation and make some decisions at the one -year anniversary of your financial upturn, she says.
The one-year review "is meant to keep people safe (and) focused, with room for changing their minds and making mistakes," she says.
Once you begin to become comfortable in your new financial reality, you may be ready for the successive phases, which include reviewing your situation and deciding how the money will be used, Bradley says.
This is the fun part, when you'll choose -- with the help of your trusted advisers and a solid financial plan -- whether to retire, buy a vacation home, donate to charities or set up trust funds for your children.
The ultimate goal of all these steps is to create a sensible plan for handling your windfall that also allows you to come out with your relationships and sanity intact.
"The whole point of process is to build a better sense of well-being -- (to) go through change and transition and come out better in terms of your family, security, vibrancy, as well as money," Bradley says. "Holding onto the money is only part of the equation."