If people look at it like they just won the lotto, they spend it like idiots.
Maybe you’re just about to receive an inheritance from a relative. Perhaps you made a brilliant investment. Or maybe your number came up in the big lotto. In any event, there is money coming your way. It sounds great, but there are downsides to receiving large sums — it’s often not as simple as stashing the money in the bank and going on your merry way.
First off, that money — no matter how much — is not limitless. So, no, you probably can’t quit your job.
“When the money is big and it is fast, it feels more expanded, like all things are possible with it,” said Susan Bradley, a financial planner and founder of the Sudden Money Institute in Palm Beach Gardens, Florida. “There is a tendency to feel like you can do anything you want.”
About a quarter of Americans aged 18 to 59 expect to receive an inheritance from family, according to a survey by US site Interest.com. In the UK, three-quarters of 20- to 35-year-olds believe there is an inheritance in their futures, according to the UK’s Skipton Building Society. In New Zealand, a housing boom has allowed homeowners to sell at higher prices than they had ever anticipated.
“The average household has made a small fortune,” said Rod Mudgway, a financial advisor with Brackenridge Financial Solutions in Auckland, New Zealand. In India, windfalls are usually business related. “In other words, people suddenly come into money because their business ideas work,” said Devang Shah, a financial planner with Rodriguez & Shah in Mumbai, India.
No matter how you come into it, there are a variety of ways to make mistakes with it. Here is how to make the most of your good fortune:
What it will take: Time, mostly. One of the biggest mistakes that people make is acting right away. “Rather than making spending decisions or commitments, give yourself a time-out,” Bradley said. “There is usually no urgency. Whatever you would spend the money on today will probably be there a month from now.”
How long you need to prepare: For an unexpected windfall (as most are) take several weeks to find a tax professional and discuss spending priorities with your family, before making any big purchases. If you know ahead of time that a large sum of money, such as an inheritance, is coming your way, it is wise to engage the services of a tax professional ahead of time.
“Even if you know your mother is in good health, start talking to a tax person,” said Bill Hammer, Jr., a financial planner with Hammer Wealth Group in Melville, New York. “Frankly, you will make better decisions because you are not just dealing with the grief of losing a loved one.”
Do it now: Assemble your team, particularly a tax advisor. First and foremost, you want to make sure that the money gets to you in the most tax-beneficial way possible. “It is very difficult to undo something if it was not done properly,” Hammer said. Then secure the money in a safe institution that does not charge you large fees. You might also want to engage a financial advisor, who can help guide future investment decisions, such as whether to keep your windfall in cash or buy stocks. Ask colleagues and trusted friends for a referral.
Then… do nothing. In the beginning, everyone is going to have an opinion about what you should do with the money — including you. “People will come to you and say, ‘If you give the money to me I will open a bar and you will be super rich,’” Bradley said. Or you will feel, as many parents do, that you would like to help a child out with a home purchase, or pay the rest of her college bills. Give yourself a few months before you make any decisions beyond a nice dinner out. “There is a type of stress that comes from a positive event,” Bradley said. “And our ability to make decisions and see the big picture drops. It is universal.”
Tell everyone that you are doing nothing. This is important. Be prepared to say, “I am going to take some time to catch my breath.” Say it over and over again. “We have people actually practise it,” Bradley said. “Because when they are on the spot and people are hitting them up, they lose that commitment and all kinds of things happen.”
Do it later: After three to six months, focus on immediate financial goals. If you do not already have one, “create an emergency fund,” said Michael Lodhi, a financial advisor and founder of the Spectrum IFA Group in Paris. You should have three-to-six months of living expenses in the event of an emergency. Wiping out credit card debt is also a good early move.
Talk to a financial advisor about the wisest course of action with the rest. If your retirement savings could use a boost, an advisor can help you determine where best to invest. If you are in strong financial shape already, you can discuss whether you want to send some of it toward your children or toward charity, either now or via estate planning.
Do it smarter: Think hard before changing your circumstances. Many people, for instance, discover only after buying a big house that it costs more to maintain it than they expected, and that expensive car might be murder to insure.
“Make lifestyle changes a conscious decision, especially for the family” Shah said. “It would help to have a conversation on what changes are okay.”
Be sure you get in sync with your spouse. If the money belongs to both of you, Bradley recommends that each spouse make a list of things he or she would like to do with the cash — along with why each is important, when it should happen, and how much money it would cost. Compare prioritised lists. If they diverge significantly, take some time to discuss your desires and come to a shared decision.
You may be more likely to handle the money responsibly and wisely if you remember that the person who earned that money worked an entire lifetime to build it. “If you keep that in mind, you will spend the money differently,” Hammer said. “If people look at it like they just won the lotto, they spend it like idiots.”