Melissa A. Seamon, CFP®
You're Suddenly Wealthy; Now What?
Situations will arise in life that will alter your financial situation. Sometimes the impact is relatively minor, like an increase in expenses or an upswing in your investments. Other times, though, the effect on your finances can be drastic. Knowing what to do when you suddenly come into wealth can be overwhelming.
Five crucial things to do when these life-changing situations arise.
1. Haste makes mistakes
Coming into sudden money is usually accompanied by a host of competing emotions—from excitement and happiness to guilt and confusion. Whether your windfall is the result of something positive such as the long-awaited sale of an asset or business, or the unfortunate passing of a loved one, most sudden money situations are highly emotionally charged. And as we’ve explored in our previous literature on behavioral finance, emotions should not steer the decision-making ship!
In facing your new situation, first allow yourself to mentally process the underlying event before making any major money decisions. You might be tempted to upgrade your vehicle or pay off all your debt, but making major decisions while under emotional duress can easily lead to regret. Even if the event responsible for your windfall isn’t emotionally charged, coming into a large sum of money itself is enough to send anyone on an emotional rollercoaster.
2. Get Organized
Once things have settled down, it's time to get organized.
There is typically no shortage of paperwork involved in settling sudden money situations. As you receive important documents, develop a system to keep everything organized in one place—whether that is in a physical folder or scanned and saved digitally in a secure online vault. The documents associated with the cause of the new money will vary from one situation to the next. For instance, you'll have different documents after a legal settlement compared to a loved one's passing. Gather whatever records pertain to the source of the funds, as well as your personal financial documents. All of this will be helpful to have on hand.
This simple step is going to help prevent you getting overwhelmed and help you stay in control of the situation.
3. Define Your Goals
Once you've gotten organized, you'll want to determine your end goal. How you define your goals can determine whether or not you achieve your goals.
Debt: Do you have personal debts to address?
It is usually wise to pay off personal debts immediately (with few exceptions). The cost of interest on consumer debt like student loans and credit cards will almost always outpace the possible earnings of investment income, so it’s best to eliminate those drags before investing excess income.
Life Goals: What do you want this sudden wealth to do for your future?
What are your priorities in life? Now is an excellent time to decide if you intend to leave a legacy for your heirs. If you’re charitably inclined, giving might be paramount to your long-term plans (and can help you save in taxes). You future needs should always inform your current decisions when it comes to handling sudden wealth.
Major Purchases: Are there bigger one-time purchases you’d like to make right away?
It is common, natural, and absolutely acceptable to spend some of the money you've received. However, it might be best not to try and buy everything immediately. Instead, focus on spending money on your initial needs and things that will improve your quality of life over time. Save purchasing your "wants" until after you've got the rest of your financial plans in motion.
4. Protect Yourself and Your Assets
Inheritors of sudden wealth often find that friends, family, and salespeople tend to grow more interested in them after receiving a windfall. Of course, this is not to say that all have ill intentions, but there will undoubtedly be some who will not have your best interest at heart. You’ll need to identify your allies early on to protect yourself and your assets.
- Personal Allies
These are your confidants! Friends, family members, and professional associates in your inner circle with whom you trust and can speak with openly. You will turn to them for help with your wealth transition, and they will be the ones who support you personally.
- Professional Allies
Your professional allies will help you deal with financial, tax, and legal matters. They are paid professionals whom you can trust to help you make the most of your sudden money situation. Take the time to vet these individuals thoroughly before engaging their services.
Common professionals you will want to connect with will be:
● A Certified Public Accountant (CPA), who will help you navigate taxes, as well as a level of asset protection
● A Financial Planner who can guide you to long term growth.
- Make sure they have a fiduciary responsibility, meaning they are legally obligated to place your success ahead of their own
● An attorney who is familiar with tax and estate planning
● An insurance agent who can help you with asset protection as well as financial products like life insurance
5. Take Small Bites
Suddenly coming into wealth can be exciting, frightening, and overwhelming all at the same time.
Once you begin speaking with your professional allies, a simple conversation can lead to what feels like elephant-sized decisions. Things may seem like they’re starting to move quickly and you may feel rushed to make your decisions. Always go back to step one and breathe. Try to make only one decision at a time. By breaking each big decision down into small bite-sized decisions, you'll be more confident every step of the way.
Follow these steps, and you'll be on track to turn sudden wealth into long-term wealth with confidence.
If you find yourself in a sudden money situation, or stand to inherit a windfall in the near future, we encourage you to reach out to us at 1-800-550-3880 or schedule a call on our website for a free consultation. Putting together a comprehensive financial plan is the best way to ensure you use your windfall to its fullest potential.
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