Lottery or other Financial Windfall of millions, how can you manage money successfully ? what to do with money?
What will you do if you win the mega million jackpot? Yesterday, I read a news in CNN that two winning tickets, from Idaho and Washington, will share a $380 million Mega Millions jackpot, the second largest in U.S. history. Wah!!
Windfall is getting a large sum of money in a very short period. You may be thinking "I wish! It should happen to me!". Believe it or not, over the course of a life time, it probably will happen to you at least one.
Windfalls are't limited to lottery winners. It can be
- A divorce settlement (Have you seen the movie ' Intolerable cruelty'?)
- A lawsuit settlement
- An insurance settlement
- A real estate sale
- Stock options
- One time, huge income bonus
- A sudden growth of business
- Sale of a business
- A new job with a big increase in salary
Curse of the Windfall
Successfully managing a windfall can be very challenging. Some winners don't live happily ever after. A commonly heard statistics is that more than 75% of the windfalls are squandered. I had also read a news (NBC) that more than 70% of lottery winners exhaust their fortunes within three years. Have you heard about Andrew "Jack" Whittaker? He is a construction company owner (already a millionaire) from West Virginia who won $315 million from Powerball in 2002. His life went upside down after that. Lawsuits, divorce, drunk driving, the theft of a cash-stuffed briefcase in a strip club, and the untimely deaths of his daughter and granddaughter.
The purpose of this article is to prepare you for that day, when a windfall floats in your life. By understanding what is going on and taking the right steps, a windfall can enrich your life rather than leaving you with regrets.
What to do with Windfall
Close your eyes for a minute and image yourself playing the lottery and winning $50 million. Now you have to think what will you do with $50 million ? I tried this once. I could not decide what to do with money. When I opened my eyes I was completely confused.
When there is sudden influx of money, it triggers emotions ranging from ecstasy to depression.
So how to manage the wealth generated by windfall?
Buy Gold when others invest in Stocks
STEP1: Clear your debts.
First step to do is to clear all your high interest debts. If you have credit card debts, home loans or other loans pay them back and become financially independent. Also, if there are any taxes due on the proceeds, be sure and pay them too.
STEP2: Deposit the money in a safe account for at least six moths and leave it alone.
The emotions that accompany a windfall are temporary and usually go away within six months. The most important secret to preserving a windfall is to not touch it until the emotions subside and you come up with a sound plan for putting the money to work.
The usual temptations
- Invest in "can't miss" investments suggested by broker
- Become the 'Bank' of friends and relatives
- Buy a luxury home to tell the world "I've made it"
- Buy a luxury car to impress friends
- Make a large donation to favorate charity
- Buy a boat, plane or other expensive toys
- Quit your job
Please don't fall into the above temptations. Please wait atleast six months, so that your emotions don't rule over you.
STEP3: Make a realistic estimate of what the windfall can buy
A large sum of money can create illusions of endless wealth. By the time people realizes it, the money is gone. I will tell you an example. Imagine that you won $1million lottery. Are you a millionaire? Probably you won't be as you have to pay the taxes. You may get around $600,000. Unless you have $400,000 previously, you are not a millionaire. Sorry!
Use a calculator and calculate your net worth. Estimate all your present source of income Once you have that informations, you are better equipped to decide how to get the most lifetime satisfaction from the windfall.
STEP4: Get a wish List
Write down what you would like your life to be like if money wasn't a factor. Would you quit your job? How would you spent your days? Where would you live? What would you like to become?Envision how you want your life to be
- in a year
- in 5 years
- in 10 years
Now translate your dreams (your wish list) as goals with realistic deadlines for achieving them. You have to write them down in a piece of paper.
STEP5: Prioritize your goals
You have to prioritize your goals and rank them. You have to decide whether buying expensive toys like a jet plane is more important or buying a house for your family.
STEP6: Align your spending with your goals
If you want to start a business, is now the right time? If not how long the windfall has to compound(by investing in bonds or shares) to make that dream a reality? Is there a hobby or activity you've always wanted to pursue?Refer to your goals when deciding what to do with your windfall. Instead of frittering the money always,you'll invest in making your dreams come true.
STEP7: Get professional help
Acquiring a windfall can be wonderful, but it comes with its own set of problems. Enlisting the help of the right financial professionals is usually a very worthwhile investment that saves time, money and headaches.
"Don't hire a fox to guard your henhouse"
Many so called financial professionals are really financial salespeople. This is not the right time to ask them for advice. They are most interested in selling you what makes the most money for them. So there will be a conflict of interest. What you need is someone you can pay to provide you with objective advice that's in your best interest.
Who can help you in financial planning?
A good place to begin seeking advice is from Certified Public Accountant (CPA) who does not sell investment products. However, get your advice from different sources.
A good CPA can help you in
- Assess your overall financial wellbeing
- Tax calculation due on the windfall
- Recommend the additional insurance you may need
- Give you a clearer picture how the windfall can help you achieve your long term financial goals
Financial planners can also help you with this. If you feel you need one, look for a reputed planner who has experience in dealing with clients who find themselves in possession of a windfall.
Successfully managing a windfall requires to understand the psychological and financial realities that come with it. I hope you find this hub useful. If you have some ideas to share with the readers of this hub, please leave your comments in the box below.
Thank You and GOOD LUCK.