What would you do if you won the lottery, or received a huge settlement or inheritance? It’s something most of us have happily dreamed about, but actually coming into a giant sum of money can be overwhelming and even a bit frightening. There’s the temptation to make big ticket purchases, pressure from family and friends to “share the wealth”, and fraudsters at the ready looking to scam you out of big bucks. So, what should you do with all that money? Here are some tips to consider when you find yourself faced with a financial windfall.
Keep calm. Let’s face it – it’s extremely tempting to want quit your job, or trade up for a bigger house when you suddenly have big bucks in the bank. But you’d be surprised at how easily some people overestimate their newfound wealth. Many lottery winners are shocked when they find out the amount of taxes that will be taken out of their winnings. And moving into a giant house can come with super-sized utility bills, increased property taxes, and massive upkeep costs – things people can easily forget about when they’re in a rush to buy. When you receive an unexpected sum of money, it’s important to refrain from impulsive decisions you could later regret. Rather than take any immediate steps, it’s essential to start thinking through your financial options, and prioritize which ones are most important to you.
Think long-term. As you’re weighing the various things you can do with your newfound financial freedom, it’s crucial to think further down the road than just buying a new sports car or some fancy jewelry. The National Endowment for Financial Education reports that an estimated 70% of financial windfall recipients lose the money within just a few years of receiving it, and you don’t want to meet that same fate. In order to help make your money last, it’s a good idea to consider putting some of it aside for your future. That could mean setting up a retirement account, creating a college savings account for your children, or establishing an emergency fund, depending on where your savings currently stand.
Pay up. While it’s important to plan for your future financial needs, it’s equally important to assess your current financial situation and obligations. If you have a lot of credit cards to pay off, now’s the time to do it. Credit cards typically have some of the highest interest rates out there, so the longer you keep that debt, the more you’re going to end up paying in interest fees. Likewise, if you have any unpaid bills, you should pay them immediately in order to avoid additional late fees or judgments against you. You should also evaluate any loans you currently have. Depending on the terms of your loans, and your current interest rates, it may make financial sense to pay them off if you don’t have a pre-payment penalty. Doing so could end up saving you a lot of money in interest.
Get advice. It’s very important not to “go it alone”. A newfound wealth comes with a lot of considerations, including investment opportunities and tax obligations. In order to ensure that you make the wisest decisions with your new money, and understand any potential risks associated with those decisions, it’s critical to consult with financial professionals that you trust. Depending on what you’re looking to do with your money, and what questions you have, it could be a good idea to meet with a tax advisor, an accountant, an investment manager, or even a finance lawyer. Just make sure you do your homework to find advisors you can trust.
Protect your cash. Coming into significant wealth can put a target on your back, especially if your financial windfall was broadcast to the public - like in the case of a lottery winner. For this reason, it’s very important for you to be vigilant, and on high alert for any potential scammers. Stay up-to-speed on popular scams and fraud tactics, and protect your personal and financial information when you’re online or using a mobile device.
By refraining from impulsive decisions, and thoughtfully planning out your financial objectives with the help of trusted professionals, you will have the best chance of making the riches from your financial windfall last, and providing a secure financial future for yourself.