The following is a collaborative post by Sarah Deacon
Receiving a huge wad of cash is everyone’s dream. But if you do receive a financial windfall, do you really know what to do with it?
A sudden windfall involves coming into a substantial amount of money you may not have been expecting. It can come from an inheritance, cashing out on an investment spike, property sale, winning a lottery, or a lucrative litigation settlement.
One problem with receiving a large sum of money is that people tend to think that they have much more wealth than they actually do, and that it will last forever. Consider how 78% of NFL career players who earn ridiculously high salaries go broke within three years of retirement. No matter how big your windfall is, if you make avoidable mistakes, you can still end up not achieving financial independence.
So, here are some mistakes you need to avoid after coming into sudden wealth:
Go on a spending spree
This one’s obvious, right? But coming into a financial windfall can be an emotionally charged experience. A BMO Wealth Management Report published on Bloomberg highlights how half of Canadians surveyed changed their priorities and financial goals when confronted with sudden wealth. This is especially important as it is predicted that $1 trillion (C$1.3 trillion) in personal wealth is expected to be transferred to the next generation by 2026.
Instead of deciding what to do with the money immediately, the wealth management company urges people to take the time to sort out a good wealth plan. For instance, they should concentrate on writing off their debt and owed tax before rushing into complex investment decisions.
Loaning it out to relatives
One key insight found in the study above is the fact that “sharing with relatives and friends” shot up in the priorities of those surveyed after a windfall. While it’s true that sudden wealth affects your family, giving in to rapacious relatives hoping for cash loans can be detrimental to your personal relationships.
Loans made out to relatives have a curious way of not being paid back. In addition, it’s the fastest way to ruin relationships. If it’s really unavoidable, opt for one-time cash gifts instead of a loan. This way, the new found money won’t put a strain on your personal life. Be careful though, as cash gifts to relatives can add up fast.
Sinking it all in investments
Many think that coming into a lot of money should prompt you to invest in the stock market and potentially multiply your earnings. While it sounds counterintuitive, think twice before suddenly venturing into stocks.
In fact, self-made billionaire and Shark Tank host Mark Cuban notes that suddenly having a huge sum of money does not make you a smart investor. Instead, he advocates that you “don’t make investments” and “put it in the bank and live comfortably”, especially if the earnings were won from a record Powerball lottery worth $1.5 billion (C$2.19 billion). The current prize is much smaller with Lottoland detailing that the Powerball jackpot currently stands at approximately $120 million (C$159 million), so this advice is even more important. After all, it is very easy to lose large amounts of money on failed investments.
A big reason for this is that once you accumulate a lot of wealth it is like having a target on your back. This is where financial management skills come in extra handy, as people will try to sell you ‘no-fail investments or risk-free opportunities’. Always seek a professional opinion for any type of investment. The goal is to minimize the avoidable mistakes and to maximize the benefits of your new sudden wealth.
The best option is to take a step back and prioritize where you really want the money to go, and then formulate a plan so that you will achieve your financial goals.