Sudden Money: Six Steps for Handling a Windfall
It's everyone's dream. Winning the big jackpot that changes everything. But even if you weren't one of the winners of the Mega Millions lottery, the issues that come with sudden money may still apply to you. In fact, you have many opportunities to experience sudden money that have nothing to do with winning the lottery.
At my Orange County financial planning firm, one of the areas in which I specialize is working with sudden money recipients. It's always exciting to experience sudden money, even vicariously. But there are usually significant and unique financial, tax, and emotional issues that, if not addressed, can cause the money to disappear almost as quickly as it comes.
Most of us are used to gradual money, which comes from earning an income and building a nest egg over time. It's a slow and steady process. As our net worth increases over the years, we adapt and slowly become more financially sophisticated. It's like riding a smooth elevator -- you're going up, but you hardly feel it.
Then there's sudden money. It's like being on the ground floor of a 60-story building and rocketing to the penthouse suite in seconds. Sudden money means getting more money than you're used to being responsible for, and getting it all at once. The most common sources of sudden money are lawsuit judgments, divorces, business sales, inheritances, retirement packages and stock options.
If you experience sudden money without a plan, you may find that your sudden money is suddenly gone. Have you heard of the woman from
Here are six steps to follow if you want to keep more of your inheritance, divorce settlement or lawsuit judgment:
1. Build your financial team.
While you may be in uncharted waters, you'll want to create a financial team composed of people who live and breathe in these waters. They can help you navigate the numerous tax, financial, legal, and yes, even emotional issues that arise.
2. Calculate your "end of the day" number.
Your end of day number tells you how much you have to spend, invest and live on. It's a critical number. Don't buy anything, invest or make any money decisions until you know this number.
End of the Day Number
(Sudden Money + Previous Savings) -- (Taxes Due + Total Debt)
3. Create a wish list.
Brainstorm all of the things you want to own and do with the money. Don't hold back. Categorize every item as "Would Like" or "If Possible." "Would Like" items are things that are important to you such as buying a new home, paying for your child's education and donating to church or charity. "If Possible" items include everything else: travel, gifts to family members and quitting your job.
4. Determine what is possible.
Before you buy that house or car, and before you quit your job, you need to determine how far your sudden money will allow you to go. Give your ranked wish list to your accountant or investment advisor to help you calculate what you'll be able to do without getting into financial trouble down the road. If the people who received the sudden money I discussed earlier had taken the time to complete just this step, they wouldn't be broke or in debt today.
5. Go back to school.
You don't really have to go back to school (unless you want to!), but you should take some time to get a financial education. Your financial team should explain concepts and strategies so you understand them, but there's no substitute for studying the issues on your own.
6. Monitor your finances.
Meet with your investment advisor and/or CPA at least once a quarter (or more often if events in your life have changed). Again, if the sudden money recipients discussed earlier had monitored their financial situation, they'd be in much better financial shape right now.
This is an overly simplistic list of things to consider, but it's a great place to start. If you didn't win the lottery last week, don't worry. You don't need luck to get rich. By using the other eight hours, you can create your own sudden money.
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Personal Finance - Sudden Money: Six Steps for Handling a Windfall
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