How To Manage A Cash Windfall By Roger Wohlner
Many of us fantasize about winning a big lottery jackpot. Let’s say that actually happened? What would you do with the money? How would you manage it?
While winning the lottery is a real longshot, cash windfalls are not that uncommon. People inherit money or receive a life insurance payout when someone dies, they sell businesses or professional practices, they win a judgment in a lawsuit, receive a sizable divorce settlement, or take a 401(k) rollover or lump-sum distribution from a pension account all of which can result in a sizable windfall.
The number 70% seems to be a common one in terms of the percentage of lottery winners and retired NFL and NBA players who end up in financial difficulty. If you're the recipient of a cash windfall what should you do, how should you manage it?
TAKE A STEP BACK
There is no rule saying that you have to do something with the money right away. In fact many financial advisers would counsel you take some time and do some financial planning. This is especially true in the case of a large and possibly unexpected windfall.
Don’t succumb to pressure from family, friends, or pushy financial sales types. It’s your money and your life. Get the financial guidance you need, take the time to plan out what you want to do with the money, and then move forward. Refrain from making rash spending decisions.
Depending upon the size and the nature of the windfall you will want to assemble a team of experts that might include a financial adviser, a tax professional, and perhaps an attorney for any estate planning issues created by the windfall.
If the windfall was an expected one, such as a large retirement plan rollover or proceeds from the sale of a business, you quite likely have been working with a financial adviser or tax professional or both already. Lean on these trusted advisers for help in managing this windfall.
In the case of an unexpected windfall, your team of advisors is even more important, especially if you are not accustomed to having money to manage.
HIRE HELP CAREFULLY
I’m frequently amazed when I read about professional athletes who have made tens of millions of dollars over their career who end up in financial trouble. Likewise, with winners of the lottery who go broke.
Often this is attributable to having received bad financial advice, or worse, having been the victim of financial fraud. While there is no surefire way to ensure that you don’t hire a bad adviser, it pays to interview several and to do some checking on them.
Check out this guide to choosing a financial adviser from NAPFA. http://www.napfa.org/UserFiles/File/PursuitofaFinancialAdvisorFieldGuidev14.pdf
DEAL WITH THE EMOTIONAL ISSUES
Windfalls such as an inheritance or a divorce settlement will likely also come with some emotional issues. The death of a loved one is always tough to deal with. Divorce may entail anger, sadness, and a feeling of being alone. In the case of a widow or divorcee, this might be the first time that you’ve had to deal with your finances on your own.
It’s important to let yourself deal with these issues and not to make hasty financial decisions based upon these emotions. Also important: don’t let any financial adviser talk down to you because you are inexperienced in dealing with financial issues.
LEARN TO SAY 'NO'
Once family and friends get wind of your newfound wealth you might find them lining up for a handout. Certainly, helping those close to you is good thing, but you need to set limits and you also must learn to say no. Who you help financially and to what extent will depend upon your circumstances, relationship dynamics, etc. Failing to set limits here is a great way to end up broke.
PLAN, PLAN, PLAN
The key to your financial success in terms of managing your windfall is to plan. Specifically have a financial plan in place. Define your overall financial goals and put a price tag on attaining them.
Has your windfall gotten you to where you want to be in terms of providing your children with a college education or being able to fund a comfortable retirement? Has it significantly narrowed the gap from where you are to where you want to be? Is the windfall enough to allow you to alter your current lifestyle and still achieve your long-term goals?
THE BOTTOM LINE
A cash windfall can be a life changing event, especially if it is unexpected. You want to make sure the impact on you and your family is a positive one, even if the windfall is the result of an unhappy event such as the death of a loved one or a divorce.
Make sure that you take some time to do some internal planning and soul searching. Most of all hire a team of competent financial advisers to help guide you in doing a financial plan, investing the money, and dealing with any tax or legal implications that might accompany the windfall. It’s your money, take control.