Here are 10 steps to take if you are the beneficiary of a financial windfall
By Jim Terwilliger
It might be an inheritance. Or a stock buy-back at work. Or an insurance or divorce settlement. Or even the lottery.
It’s one of those once-in-a-lifetime events that is generally unexpected. It is exactly for this reason that most folks are ill-equipped to deal rationally with such an event. An immediate rush of euphoria quickly transforms into a panicked “now what the heck do I do?”
We have all heard stories of people who achieve instant wealth and believe they are set for life, free from financial worries forever … then proceed to make terrible choices and find themselves, a year or two later, with no money, worse off than ever.
Charles Sherry, founder of Financial Jumble, LLC, recently wrote on this subject. He suggested 10 steps that should be considered when dealing with sudden wealth.
Let’s be clear. We’re not just talking about a million dollars plus. These same steps are just as relevant for any amount of windfall. For some, $50,000 fits the sudden wealth definition quite nicely.
So, what should you do if you happen to be the beneficiary of a financial windfall?
1. First, do nothing. That’s right, nothing. Sherry suggests waiting at least six months before making any life-changing decisions. The time spent waiting and planning allows the “shock” of your newfound wealth to wear off.
Besides, you need to take time to understand exactly what you’ve received. Is it all cash? Stocks and bonds? A business or real estate? Are there income tax consequences? If so, know what they are and how they can be minimized or managed.
2. Work with a trusted adviser. Do you already have a relationship with a financial professional? If yes and that person has mapped out a solid financial plan for you based on your goals, you’re all set. If not, seek out a fee-only financial planner, preferably one having the CFP® designation. Interview two or three and choose the one you are most comfortable with.
3. Doing nothing also means not quitting your job. It may be tempting, but chances are your windfall will not sustain you for the rest of your life, perhaps not even close. Again, wait at least six months before making an irreversible job change. You will have plenty of time to consider career options and take action when you know where you are headed.
4. Reduce/eliminate debt. Consider paying off high-interest debt. Even low-interest mortgage debt can be considered. Rely on your adviser to help you make these choices. A great outcome from paying down debt is the resulting reduction in monthly cash flow demands and associated peace-of-mind.
5. If you don’t have one, start an emergency fund. Set aside reserves of at least three to six months, preferably the latter. The future can sometimes throw you an unexpected curve ball. Having reserves set aside will reduce your financial stress. Much like reducing cash flow demands, having an emergency fund creates financial flexibility.
6. Allocate additional funds toward retirement. Using some portion of a windfall to enhance retirement savings is almost always a must-do. Very few folks believe that they have saved enough for retirement.
7. Think about tax and estate planning. No one is sure what may or may not happen to the tax code this year. But it’s critical that you understand the tax ramifications of your windfall in order to maximize the financial benefit.
Additionally, life changes provide a perfect opportunity to update your estate plan, especially if the windfall increases the complexity of your financial situation or puts you into estate tax territory.
8. Be cautious. Less-than-reputable salespeople and relatives may suddenly warm up to you, with the unspoken goal of separating you from your money. That is why a trusted adviser is critical. If you have a well-thought-out financial plan, it’s much easier to pass on potentially exploitative offers.
9. Consider charitable giving. Do you have a favorite charity? Would you like to help a grandchild finance his/her education? Take the opportunity to explore the possibility of helping others. There are myriad lifetime charitable gifting options to explore and consider.
10. Have some fun. There’s nothing wrong with treating yourself, particularly if your finances have been always tight. Do you like to travel? Have you thought about an addition to your home, finishing your basement, remodeling your kitchen, or upgrading appliances? But be careful not to direct a majority of your windfall to the fun category.
Receiving a sudden financial windfall is a life-changing event. Work with someone you trust to ensure it yields a positive outcome for you and your family.
James Terwilliger, CFP®, is senior vice president, financial planning officer, Wealth Strategies Group, Canandaigua National Bank & Trust Company. He can be reached at 585-419-0670 ext. 50630 or by email at firstname.lastname@example.org.