If you are lucky to receive a large windfall—from winning the lotto jackpot, insurance proceeds, unexpected inheritance from a rich relative you have not seen before, or proceeds from the sale of a piece of family land—one thing is certain; money is not infinite! You can lose it just as fast as you have gained it.
Do you have what it takes to keep that money to last a lifetime or will you suffer the same fate of some lotto winners who ended up poorer than they were before?
Consider the following money principles to prepare you in handling a sudden financial windfall:
Be comfortable with money
Your money mindset and behavior towards money will dictate the outcome of your windfall story. One culprit behind the sad ending of some lotto jackpot winners is their poor money habits. Most lotto winners share the same profile before hitting the jackpot—they are constantly in survival mode, barely making their ends meet. Their only concept of money is that it is for spending. Spend for basic needs and survive. Saving is impossible, investing is a foreign language and poverty is the enemy. Throughout life, they are accustomed to having only a couple of hundreds in their pockets. So, when they receive a sudden inflow of millions they start to panic and get emotional. They have no idea about how to treat the sudden fortune. Restlessness sets in and they will treat their newly found wealth exactly as they did with the couple of hundred pesos they previously had—spend it all!
If you want your good fortune to last a lifetime, dump your old money habits and do not let money control you, be in control of the money.
You see, being comfortable with money means that you can relax and take a pause once you get hold of that sizeable windfall. It also means that you do not get emotional about it. The more emotional you are the less control you have and that’s where reckless decision-making begins.
Avoid being an impulsive Santa Clause
While it is tempting to shower your family and friends with material things from your newly found wealth, I say proceed with care. It is easy to get blinded by the size of your new wealth, thinking that it will never run out and giving away some will not severely diminish your nest egg. Giving is good but you don’t want people to regard you as a walking cash dispenser. Learning to say “no” is an effective defense against unscrupulous people trying to take advantage of you. Remember to set your priorities in order before wearing that Santa hat.
List down and prioritize your wishes
Before doing anything with your money, spend time to list down, in the order of priority, all the things you want to do with it. Giving in to all your spending desires all at the same time is a sure path to return to being broke again. Deal with things that need immediate attention, like settling all outstanding liabilities before considering anything else.
Build you financial safety net
Now that you have an upgraded lifestyle to protect, all the more you will need these financial safety nets. One critical illness can wipe your entire fortune in a few years and leave you with money hemorrhage. So, invest in health care insurances to avoid paying health care expenses out of your pocket.
Set aside funds to cover you from financial emergencies. Ideally, you should provide for between six months to one year of your monthly expenses. Emergency fund serves as your financial cushion when financial disasters strike.
Gather your wealth team
Do-It-Yourself, or DIY, might be a great idea if you’re fixing a leaking faucet in your home but in managing a huge windfall, asking the right people for help is the smart thing to do. With a colossal amount of money suddenly under your name, you will start to live in an uncharted territory where you can easily get lost. Get help from people who are competent in their fields to help you navigate through your new situation. You might need an accountant to help you with your taxes, a lawyer to help you with your estate planning, a registered financial planner to help you piece together a financial plan and help you grow your money.
Assemble the right people to help you avoid making costly financial blunders.
Let your money work for you
Now that you have found wealth, it’s time to enhance and preserve it. Instead of spending most of the money on luxury goods spend it on assets. Buy assets that will generate additional income for you; income that will fund your splurging desires.
Three assets that you can use to create additional financial pipelines:
Business—Harness your entrepreneurial spirit. What better way to stretch your newfound wealth than to build a business? Start by looking for problems that your potential business can offer solutions. Every successful business is an effective problem solver.
Real estate—Real estate investments are great investment tools that can provide you with steady cash flow through rental income.
Paper assets—Stocks and bonds are examples of paper assets. These are investment vehicles that will generate earnings for you without having direct participation in the operations of the business where you are invested in.
Get some fun and enjoy
After getting into terms with your new circumstance and putting your financial house in order, indulge yourself and enjoy a little bit of freedom with your windfall. Set aside a small parcel of that windfall to spend on your “wants” but be mindful of your spending. The key to avoid overspending is to identify a specific percentage of your windfall that you’d like to allocate for your indulgences say 5 percent or 10 percent and make sure to stay within the limit.
With proper planning and the right attitude towards money, your windfall may provide you and your family the kind of lifestyle you’d like to lead, free from financial worries for the rest of your life.
Jesi Bondoc is a registered financial planner of RFP Philippines. He is the director of My Wealth MD and Partners, Inc. specializing in investment advisory and oversight. You can send your money questions at firstname.lastname@example.org or email@example.com and they’ll be answered in his next article. For more information about Registered Financial Planner program, e-mail to firstname.lastname@example.org or text <name><e-mail> <RFP> at 0917-9689774.