When you receive a lump sum, it’s very tempting to splash out on your dream holiday or a new car, but that isn’t the best way to get the most out of your money. The general rule is to not do anything too hasty (such as buying a luxury car or a bigger house) because more often than not, the money will run out must faster if you don’t do anything useful with it.
Just because you have it doesn’t mean you must use it. And after splurging, there’s a good chance that you’ll end up more in debt than before you started.
It is tempting to squander a large sum of money, but becoming wealthy doesn’t have to lead to disaster. Here are a few tips on suddenly becoming wealthy.
How Do You Handle Suddenly Becoming Wealthy?
Pay off your bad debts, starting with the high-interest ones. Generally, the first thing to go for is credit cards or payday loans. You’ll want to avoid the temptation to pay off a chunk of your mortgage because the interest rate is generally quite low and you can make better use of your money through investing.
Next, think about topping up your emergency fund. It’s generally a good idea to try and have six months of living expenses in an account in which you have easy access. After this, you can think about your long-term saving goals, your retirement plan in particular.
Sudden wealth will also generally mean that you should seek out financial assistance. Consult a professional, either a financial advisor or an attorney, to ensure that you comply with any conditions your windfall may have as well as how best to approach them.
Depending on the reason for the windfall, there are different ways to get the most out of it. For example, if you are fortunate enough to receive a large bonus (or regular bonuses), in addition to the guidelines above, this could be a chance for you to make some small investments to get a head start on your investment portfolio. In this instance, professional advice is essential if you want to avoid bad investments, especially if you’re a novice.
Inheritance
Should you inherit a large sum of money, there are a few more factors to take into consideration. First, any decision will inevitably be influenced by your emotions, so don’t spend anything right away. Take the time to think carefully about how you would like to proceed. Don’t let emotions cloud your judgment, especially if it’s an inheritance that comes from someone you were close to; seventy percent of those who receive a large amount of money are left with nothing after a few years because they didn’t plan their spending.
For retirement account inheritances (such as an IRA, 401(k), etc.), you’ll need to make annual withdrawals to make sure you meet any tax requirements. The beneficiary RMD calculator is a useful tool to help you get a clear picture of what to expect. Make sure whatever you do is tax efficient, especially if you’re not going to touch the money.
Using distributions from inherited retirement accounts to fund Roth IRAs is definitely something to look into. Be careful with the flow of money though, paying for college may be the first thing on your list, but get advice from an attorney on how to make sure the distributions are tax compliant to help you avoid penalties and extra taxes.
Winning the Lottery
Another scenario of sudden wealth: let’s imagine that you hit the Megabucks jackpot of an estimated $7.96 million, which has famously happened to several members of the public over the last few weeks. How would you go about managing this huge amount of money after winning the lottery?
First, it’s best that you try to remain anonymous (and this goes for any winnings), as it will keep people from hounding you for money. Next, check the tax rules, as you’re likely to have to pay a large percentage of taxes, which could mean facing a hefty fine if you fail to do so. Finally, sudden lifestyle changes are to be avoided as you’ll fritter the money away. Again, keeping within a budget is highly recommended.
Also with this situation, you’ll want to work with advisors, both legal and financial, as that would be extremely beneficial. However, you should make sure they’ll work with you and for you and not take advantage of you. You can check their work by looking up broker records, which are available from the Financial Industry Regulatory Authority. Some additional sound advice would be to set up prudent investments that are eventually divided 50-50 between equities and fixed income.
Consider Giving to Charity
Lastly, strongly consider giving to charity, as it will help you to offset your additional income. And make it a public charity, so that you can claim an income tax deduction of up to 50% of the AGI for cash contributions. Your carefully picked advisors should be able to help you to do this properly.
It is extremely tempting to squander any sum of money, especially unexpected large ones. But don’t do anything rash. Take some time to research and find out the best way to make your money work for you, as it will mean the most effective use of it and help make it last.