5 Tips for Handling a Financial Windfall

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Many people dream of suddenly acquiring a large sum of money. We’ve all seen the news stories of lottery winners who went from ordinary Joes to multi-millionaires overnight, and maybe you’ve fantasized about what it would be like to win a mega-jackpot.

It’s far more common, however, for individuals to find themselves the recipients of sudden wealth due to an inheritance, smart investments or the sale of a closely held business. Regardless of how you might acquire sudden wealth, it’s critical to have a plan in place for how you will manage your windfall. Otherwise, you could end up losing a significant portion of your wealth through mismanagement or other circumstances.

Here are 5 suggestions to keep in mind for handling sudden wealth:

  1. Assemble a team of professional advisors. Since you have probably never been faced with handling a sudden financial windfall before, the first thing you should do is surround yourself with a team of professionals who can offer objective, unbiased advice. This team should include a financial or wealth advisor, a tax professional and perhaps an attorney.

Use care in assembling your team — this includes checking the references and backgrounds of potential team members before hiring them. Consult with the Financial Industry Regulatory Authority (FINRA) and the Securities and Exchange Commission (SEC) for background information on financial and wealth advisors, with your state board of accountancy for background on tax professionals, and with your state bar association for background on attorneys.

  1. Create a comprehensive life plan. Work with your team of advisors to devise a plan not just for how to manage the money, but for how the windfall will affect your life plans for the future. This is especially important if the windfall is large enough to secure your financial future for the rest of your life.

Do you still want to work even if you don’t have to from a financial standpoint? Do you want to spend time pursuing hobbies or traveling to exotic locations? Do you want to volunteer your time helping causes or charities you’re passionate about? Your comprehensive life plan should answer questions like these and more.

  1. Create a wealth management and investment plan. The answers to these questions will help you determine how to save and invest your windfall. Work closely with your financial or wealth advisor to gauge your investment risk tolerance level and select investments that meet your short-, medium- and long-term life goals. And work with your tax advisor to gauge the tax implications of the windfall and plan your investing strategies accordingly.
  2. Learn to say “no” — firmly. After receiving a windfall, you may be approached by friends and family members who need financial assistance, have a great new business idea they want you to fund, or supposedly know about a hot stock or great investment opportunity.

While they may have a genuine need, a sustainable business model or even a good investment tip, it’s generally advisable to just say no to these kinds of requests — at least early on. Filter these requests through the lens of your comprehensive life plan and whether or not they fit into your overall goals and objectives.

  1. Don’t go on a major spending spree right away. It might be tempting to go out and splurge on a big-ticket item after receiving a financial windfall. Resist this temptation, again looking at all expenditures (but especially big ones) through the lens of your overall life plan.

However, some experts recommend spending a set amount of your windfall on one special purchase. Depending on the amount of money, this might a new car, boat or RV, a dream vacation, or a kitchen or bathroom remodel. For example, you might allocate no more than 5 percent of your windfall to such a purchase. This way, you can scratch your spending itch while remaining disciplined with the vast majority of the wealth.

 


The commentary is limited to the dissemination of general information pertaining to Frontier Wealth Management, LLC's ("Frontier") investment advisory services. This information should not be used or construed as an offer to sell, a solicitation of an offer to buy or a recommendation for any security, market sector or investment strategy. There is no guarantee that the information supplied is accurate or complete. Frontier is not responsible for any errors or omissions, and provides no warranties with regards to the results obtained from the use of the information. Nothing in this document is intended to provide any legal, accounting or tax advice and Frontier does not provide such advice. This information is subject to change without notice and should not be construed as a recommendation or investment advice. You should consult an attorney, accountant or tax professional regarding your specific legal or tax situation.

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