5-Do’s and 4-Don’ts to a Windfall

Jane Gray
Jane Gray
Published on July 28, 2017

Money:  Be it Inherited, Won, Earned or Bestowed.  A sudden windfall can be here today and gone tomorrow.

Many years ago BC (that’s Before Children for me), I was living in Phoenix and met a young woman in her early 20’s that had won a multi-million dollar lottery.

You could feel the excitement from looking in her eyes as she explained in great detail the thrill of winning it and how it changed her life because she had grown up very poor in West Phoenix and had children but no real work skills.

What tore at my heartstrings and has stuck with me to this day, was her sad story of losing more than she won.  She spent the lottery winnings all on things that had no lasting value.  How, she lamented, she was actually worse off now having bought things she couldn’t afford, vacations with her kids, money given to all her family, a mini van with all the bells and whistles that was on its last leg, and worse, owing on credit more than she could pay back.  She acknowledged that the thought of winning so much money was so wonderful thinking it was what she always wanted, but then she blew through it so fast and now it was just a bitter memory.

So this is the last part in my 3 part series about inheriting money.  You can include windfalls from lotteries, inheritance, lawsuits, stock from an IPO, the profitable sale of a business or anything where the influx is far greater than your normal income.  (BTW – You can see this same behavior in Commissioned sales people too…)

In researching my blog, I came across the Best and Worst things to do. Let’s face it.  We’re not always rational creatures when it comes to money.  We have our standard of living and a much larger influx changes the calculus of things.  It presents opportunities and challenges.  I learned a few things writing this blog.  I hope you pick up at least one new idea too.

Did you know?  In the next three to four decades, $30 TRILLION will transfer from Baby Boomers to their heirs, according to the consulting firm Accenture.

Think about that for a moment.  It will slip through a lot of fingers and land in someone else’s lap, maybe not yours if you’re not careful (I’m speaking to me too!)

Here’s the 5 BEST things to do:

  1. Don’t DO Anything. If it’s an inheritance, spend the time to heal and grieve first. Stick monies in a savings account from a month to a year. Don’t put it in the stock market or invest in your brother’s new business.  Allow time to process your pain and find your way to a rational place.  Losing a loved one can cause you to make irrational decisions out of guilt and depression.  You DON’T need to do anything right away.
  2. Seek competent advice. A windfall can radically change your financial situation, says Eike Hamilton of Waddell and Reed Financial Advisors, a full service financial advisory firm that specializes in helping people with windfall monies and properties.  They will help you make a PLAN.  Your tax bracket may change causing a ripple effect in investment objectives and your estate plan.  Consider finding a trustworthy estate planning attorney, a certified public accountant, and a financial advisor whose interests are aligned to yours.
  3. Pay down debt. Consider paying off high-interest debt or student loans with high interest rates.  Think twice before paying off your mortgage since in some cases the money could be put to better use in another investment.  Remember that interest payments on your mortgage also have tax benefits.
  4. Invest.  This can take many forms.  Go back to school and learn new skills, open a business, or simply give your money a job to make more money!  Invest in a balanced stock portfolio and consider buying rental real estate as a smart way to diversify your money.  Some savvy investors buy rental properties when their children are babies and then sell them when they they need to pay college bills.  Do this with good counsel (see #2 above).  My favorite real estate investment website is www.BiggerPockets.com.  I WISHED that I had known this when my kids were little and I had all that equity in my house!!!!  I wouldn’t have student loan debt for my sons now.
  5. Give to Charity. Here’s your opportunity to support the institutions and causes you believe in.

 

But then sometimes we have good intentions, don’t we? 

 

Here’s the 4 Worst things you could do:

  1. Going on a spending spree.  Don’t do it. Common is the mistake where people use all the windfall to purchase a mansion without considering the costs to owning that property such as property tax, maintenance, heating/cooling, and the lifestyle change they perceive it takes to live in that bigger home! Then they LOSE the home because they bit off more than they could comfortably chew.  You can treat yourself, but not to the whole cake!  According to the Get Rich Slowly blog, indulge yourself and your family by keeping 5% of a windfall.  This is a great read by the way.
  2. Giving it away to everyone who comes callingIf you make it public, you’re going to find friends and relatives come out of the woodwork with sad stories looking for handouts and loans you will never get back.Get a stiff backbone and practice saying, “No”.  Learn to be private about your windfall or you will suffer more financial woes than you had before you came into money.  One lottery winner’s philosophical insight was that it didn’t change her, but it did change the people around her.
  3. Treat a windfall differently than your current income. Avoid what’s called “mental accounting” where you tend to spend money differently because it comes from a different source.  See this one minute video for a quick explanation. Janet is a woman in her 60’s who lives in an apartment.  Her father, who recently passed away, was in real estate, and always wanted her to own her own home so he left her a good amount of money for a substantial downpayment.  She wanted a house, but she also wanted to be the hero for her grandchildren so she took them to Disneyland for a week in a brand new car she purchased and went all out because she felt she’d never been able to do anything special for the grandkids.  Real Estate agents do the same thing by going out and buying new, expensive cars with a bigger commission check as if they don’t need the money to pay bills for the months when they don’t have a closed sale!
  4. Promising or making commitments. If you just found out you are to be receiving a windfall, it is too early to make any financial or non-financial commitments.  Don’t promise friends and family money or investments until you understand what your tax implication is, what your goals are, and how much you’re actually going to net.

    Hope this sparked the rational side of your brain.  It did mine!

 

 

 

 

 

5-Do’s and 4-Don’ts to a Windfall
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