A life-changing event that results in a financial windfall can thrust you into the world of sudden wealth. Many people think that winning the lottery is the most common way this happens. In reality, you are most likely to experience a financial windfall because of a legal settlement, unexpected or untimely inheritance, a payout for a lay-off, divorce settlement, or perhaps even when one of your stock investments unexpectedly surges.
Regardless of how you receive this money, there are a few things you need to keep in mind to make your newly found fortune work as hard for you.
Things to Consider When You Receive a Financial Windfall
When you receive a significant amount of unexpected money, once you get past your initial shock, it can be easy to start planning all the fun ways you’d like to spend it.
Before you book your flight to Tahiti for your dream vacation or order that top-of-the-line big-screen television you’ve always wanted, you should know there could be a significant difference between the amount of money you’re told is coming to you and the actual amount you’ll see.
For example, a settlement from a divorce or other legal proceeding is likely going to result in associated legal fees that will reduce the final amount be able to actually access. An unexpected inheritance, a payout from a layoff, a lottery win, or a stock that suddenly surges upward will probably have significant tax implications that you’ll need to pay either when you receive the money or later when you file your taxes.
If you’re like most people who have received an unexpected windfall of money, your first thoughts probably turn to spending it on things that bring you immediate pleasure such as that once-in-a-lifetime vacation or that big-screen TV. Maybe you also think about paying off some of your debt, or want to plan college funds for your kids. And, you know that you should consider how to invest a portion of it. Many people think about doing a little bit of splurging and a little bit of saving, and perhaps even some investing.
The important thing to keep in mind is to have a plan before you come into possession of your money. The world is replete with stories of people who run through an unexpected sum of money quickly and have little to show for it in the end.
5 Investment Tips to Make the Most of Your Newfound Money
A large windfall of money could seem like a dream come true. However, it should be treated much like any other money that you have. You need to consider where the money will go for your life to be enriched now and in the future. The following tips, along with the guidance of a qualified investment advisor, who understands your needs, can ensure that you handle your money effectively.
1. Get Organized and Create a Plan
By starting out organized, you can make your money work better for you. Gather all your financial paperwork so that you can get a very clear picture of where you stand with your newfound wealth. You should include bank statements, monthly bills, loan documents, credit card bills, and any other papers that provide you with an overview of your finances.
As you get organized, it’s important to know how much of your new windfall will make its way to you. Be aware of fees and taxes that may be tied to the money you are receiving so that you can organize your money accurately. Taking the initial step of getting organized helps you to develop a plan that can address your wants and needs now and in the future, as well.
2. Pay Off Your Debt
While the thought of spending your windfall on life’s pleasures such as a larger home in a secure and gated community or a speedboat to enjoy at your new lake house may be one of your first thoughts, you should plan to earmark some of your money to pay down your debts before you do anything else.
The reward of eliminating your debt will provide instant gratification that brings less worry to your life – and in most cases, a lot of savings in finance fees and interest rates. While you’re paying off some of your debt, keep a portion of your money set aside for your emergency fund — to stop your debt from suddenly rising due to unforeseen circumstances. Focusing on your debt first can help secure your long-term financial future.
3. Give a Portion Away – Be Philanthropic
If you’re like most people, you feel philanthropic by nature. Before your sudden windfall, though, you might have found it difficult to support the charities and causes that uphold your values. Charitable contributions are a good way to make your windfall work for you.
Along with the value of helping a worthy organization, you can also be on the receiving end of tax benefits depending on the type of organization you choose and the type of donation you make. Be sure to do the proper research to know where and how your money will be used when making large donations to charity.
Or perhaps closer to home, you want to help your ailing parents renovate their home to better suit their mobility needs. Giving away a portion of your money provides you with an instant budget mechanism. You may also might find yourself much happier when you look back one day and know that your money helped someone in need.
4. Think Long-Term
Sudden access to a large sum of money can make you think that you don’t need to plan for the future but that’s a fallacy. Investing for the future is as much of an important issue when you have unexpected money as it was before your windfall. Do you want to set aside money for your kids to go to college? What about your retirement fund? Do you have aging parents that will need your help?
Thinking about these questions and how your money can best fund your needs may seem like a no-brainer, but in situations like this, you may need the guidance of an objective third party investment advisor who can look at your needs with the emotion removed from the immediate situation.
For instance, is it better for you to pay off your children’s or grandchildren’s college education before you think about your own retirement needs? While you may think that you know what you want – or need – to do, the guidance of an experienced investment advisor can help you make better decisions in the long run – because not all your decisions need to be a ‘this or that’ scenario, and an advisor will remind you of this while helping you make your decisions.
5. Find a Team of Experts
Most people who suddenly find themselves in possession of large sums of money don’t have the skills and training to handle it. You should consider lining up your own team of coaches or guides to help you – seek out experts in the investment, financial, and legal professions such as an accountant (to help you with tax implications), an investment advisor (to help you to understand your investment options), and a lawyer (help you with the items that pertain to legal issues associated with your money.)
According to the National Endowment for Financial Education, about 70 percent of people who receive an unexpected windfall of money will find themselves squandering it after just a few short years. Don’t let this happen to you.
Granite Investment Advisors provides tailored investment advice that’s customized to fit your tolerance for risk. Whether you’ve come into a sudden financial windfall or just need to talk about your current investment situation, schedule an appointment or give the team at Granite a call at 603-226-6600 to get the conversation started with our independent investment advisors.
Past performance is no guarantee of future results. Returns are presented net of management fees. There can be no assurance that any of the securities referred to herein were produced for or remain in portfolios managed by Granite Investment Advisors. A complete list of all Granite Investment Advisors’ recommendations within the preceding year is available upon request. It should not be assumed that recommendations made in the future will be profitable or will equal the performance of the securities described herein.