How to Handle a Windfall
- Financial PlanningWhat should I do if I receive a significant chunk of money?
It’s a fairytale scenario, isn’t it? Winning the lottery, inheriting a fortune from a long-lost relative, or selling a startup for millions; we’ve probably all fantasized about it at some point. But while it may sound like a dream come true, a windfall can also bring some serious challenges and risks.
I’m NOT going to cite research from the National Endowment for Financial Education, because it turns out they never said 70% of people who win the lottery lose it within a few years. I know; I thought that was true, too. But I think this post is still worth writing, because it’s easy to see how losing a windfall might happen. It must be so easy to overspend, make bad investments, fall prey to scams, or get pressured into giving money to friends and family who want a piece of the pie. And that brings up all the emotional consequences we might not have anticipated: stress, guilt, anxiety, depression, resentment, alienation, loss of trust, and so on. It would be a whole new world, and we might not be ready for it.
So, how can you avoid these pitfalls and make the most of your money if you find yourself in this situation? Here are some tips to help you plan ahead, protect your assets, and enjoy your money without regrets.
1. Take a time out: The first thing to do in this situation is take a breather. This is an overwhelming and emotional time! Don't rush into any decisions or actions you might regret later. Set aside a specific length of time for this, whether it’s a month or three or six. Maybe even leave town and ignore the phone except for emergencies. Give yourself the space to work through your emotions, celebrate your good fortune, and think about your goals and values. If you need more time than you originally anticipated, take it.
In the meantime, you may want to put your money in a safe and liquid account, such as a savings account or a money market fund. Put guardrails on this, too, such as “I won’t touch a penny of this money until I complete my time out, and until I’ve worked out a plan with my team” (see #2). This will help you avoid spending impulsively or handing out money to others who may pressure you while you’re still in the “wow” phase.
2. Build your team: If this is truly a significant chunk of change, you will want to set up a team of advisors, including an attorney, an accountant, and a financial life planner. This team will help you understand your legal and tax obligations, and your options for investing, spending, and protecting your money. If this is truly a vast amount of money, you might need more people on your team to cover other areas of expertise. Please take the time to find people you can trust and who have a proven record of handling wealth. I’m inclined to recommend that you keep family and friends out of these roles due to conflicts of interest, but hey, that’s your call. Don’t say I didn’t warn you. Money does strange things to people.
If you want to involve trusted friends or family members in some way, I do see a role for them as informal advisors. These are the people who can keep you grounded, call you on your bullshit or ridiculous spending decisions, give solid advice, and provide emotional support. In any case, review everyone on your team at least once year and feel free to add or remove people as needed. If you sense a lack of ethics or feel pressured to do something your conscience doesn’t like, you don’t need that person on your team. Ask your other team members for input if you’re not sure…and listen to what they say.
3. Set your priorities and limits: Once you’ve taken time out and assembled your team, you can start making plans for your windfall. This is the time to get explicit about what matters most to you and what you want to achieve with your money. I highly recommend you hire a coach or financial life planner with skills in this area to help you put this all in writing, keep it updated as priorities change, and hold you accountable over time. This is a great way to involve your informal advisors, too.
One of the most valuable functions your financial life planner can perform is to help you create a spending plan and stick to it. It’s important to be realistic and disciplined about how much you can afford to spend and save, and to balance your current and future needs. For example, you could choose to follow a 50/30/20 plan, which recommends spending 50% of your money on needs, 30% on wants, and 20% on savings and investments.
You might also decide set up an annuity with your financial life planner. With an annuity, you set aside some of your windfall in an account which then pays you a regular income for the rest of your life. Once the annuity is set up, you might decide not to spend any more than the income it produces; this helps you avoid lifestyle creep. Annuities can be invested so your income can increase over time; you get a raise when your investments do well. Then the rest of your windfall can be invested and saved for other goals.
This is a good time to talk about limits. Setting up your spending plan is all about setting limits around how much you want to spend in each category, including the money you give to friends and family. If you receive a significant windfall, you can pretty much count on people coming out of the woodwork to help you spend it. Please, please, budget for this, and it’s OK to budget zero if you want to, or a lot if you want to. Talk to your trusted advisors, coach, therapist, and/or substitute conscience about this.
You might even set up a process for collecting and reviewing personal requests for money or gifts to charity. Then you have a ready answer for anyone who asks for help: “OK, write that up and send it to Edwina and we’ll get back to you on April 20.” Then, “Great news; we can help with this much,” or, “The team decided to fund other requests.” You don’t even have to break the news yourself; that can be part of the process handled by your team. This may not make you super popular, but it will give you a much better chance of retaining your wealth and your ability to help yourself and others in the long run.
4. Take action: Once you’ve laid out your goals and limits, it’s time to start executing on your plan. This is where a financial life planner can help you with prioritization and the “how” of it all. Some examples of early actions you might take include:
a. Paying off your debts, such as credit cards, student loans, and mortgages.
b. Building an emergency fund that can cover at least six months of living expenses, or whatever length of time feels comfortable to you.
c. Setting aside funds for your retirement (if you haven’t already quit working for money), your children's education, or a major purchase.
d. Investing in a portfolio that aligns with your values and goals.
e. Supporting a charity or cause you care about.
f. Helping or treating family and friends.
g. Splurging on something you've always wanted, like that trip to Borneo, a fabulous Jaguar, or all the Star Wars Lego sets.
Of course you might not choose any of these options, and you might have others. But all of this depends on sticking to the spending plan and limits you set in #3. Your priorities will change over time, too, so your actions will change to match them.
5. Protect your newfound wealth: Finally, you will need to protect your wealth from potential threats and losses. Some of the steps you might take to safeguard your money include:
a. Insurance: Review and update your policies, such as life, health, home, and auto, to make sure they cover your new assets and liabilities. You may need a Personal Umbrella Policy if you don’t have one already. And you may still need a plan for long-term care.
b. Estate plan: Create or revise your will, trust, power of attorney, and other documents to make sure your money goes to the people and causes you want.
c. Legal entities: Set up a trust or a limited liability company (LLC) to protect you and your money from creditors, lawsuits, and family disputes.
d. Taxes: Reduce your tax burden by taking advantage of deductions, credits, exemptions, and tax-advantaged accounts like IRAs and 401(k)s. Plan ahead for taxes in the future.
e. Healthy skepticism: Be careful who you share your financial information with and watch out for scams, frauds, and identity theft. Don’t be afraid to check out people and the stories they tell you. And watch yourself on social media; this is how people find you and watch for opportunities to rob you or just wheedle some cash out of you.
f. Regular reviews: Seek ongoing advice and education from your team and other reliable sources to keep yourself informed and updated on your financial life.
g. Don’t be dodgy: Sometimes people who are suddenly wealthy hire domestic help under the table and pay them cash, or they get talked into fishy tax or investment schemes. Resist the temptation; any money you save or accumulate in these cases won’t mean a lot if you’re in jail or someone sues you for $100 million because they slipped while cleaning your bathtub and you don’t have proper Workers’ Compensation Insurance. You might also find yourself broke, after all that.
Believe it or not, that fairytale windfall can be a blessing or a curse, depending on how you handle it. If you ever find yourself in this situation, I hope these tips and considerations will help you make smart decisions so you can enjoy your money and use it to achieve exactly what you want.
