By Peter Mastrantuono
There are horror stories aplenty about the lottery winner who ends up broke or of an inheritance quickly squandered. While many Americans may dream of receiving their own financial windfall, few are truly prepared to properly manage it.
If someday you’re fortunate enough to receive a life-changing lump sum payment, here are some essential guidelines to make sure you make the most of your financial windfall.
Take a Breath. The mind can quickly come up with nearly an infinite number of ways to use your newfound cash, but emotions can make for bad decisions. That’s why it’s important to hit the pause button. Remind yourself that there is no good reason to make quick decisions, so put the money in a liquid, interest bearing account and let some time pass before making any decisions.
Determine Tax Implications. If taxes are due on your cash windfall, then you don’t have as much as you think you have to spend or invest. Some windfalls are taxable, like lottery winnings, while others may not be, like an inheritance or life insurance payment. Don’t rely on guess work or family members; go see a professional tax advisor to determine if taxes will be owed and whether it’s necessary to pay estimated taxes.
Create a Financial Plan. If you’re like most Americans, you have multiple financial goals, but little idea of how much savings are required to achieve those goals. By working with a financial planner to develop a plan, you will get a clearer idea of what your goals, e.g., retirement, funding a child’s college education, will cost.
Pay Off Expensive Debt. Debt is a financial albatross that costs many individuals their financial peace of mind and keeps them from achieving their long-term financial goals. If you have expensive credit card or student debt, there may be no greater use for your windfall.
Create an Emergency Fund. An emergency fund helps you weather unexpected large bills or an extended period of unemployment. No one should be without an emergency fund.
Invest Intelligently. Rather than rush into the stock market, you should work with a financial advisor to draw up a strategic asset allocation that reflects your personal risk tolerance and long-term goals. Once the investment blueprint is in place, your financial advisor can help create a dollar cost averaging investment schedule.
Don’t Forget to Have a Little Fun. It’s human nature to want to spend some of your windfall on something fun, like a vacation or building that “man cave.” It’s okay to set a portion of the lump sum aside for a fun expenditure, but it ought to come only after creating your financial plan.
A sudden and unexpected cash windfall can be overwhelming, even a little scary. Remember, you never have to do it alone. Working with an experienced financial advisor can help ensure that you make the most of your windfall.
Peter Mastrantuono is a contributing writer to MyPerfectFinancialAdvisor, the premier matchmaker between investors and advisors. Peter worked for over 30 years in the wealth management industry, focusing on retirement planning, investing, asset allocation and financial planning.
