Winning the lottery or inheriting a large amount of money from a distant relative is the kind of problem we think we would all like to have, but, it could, and in many cases does create a world of problems for those who receive the windfall.
Shady “financial advisors” appear, offering various double your money investment schemes, or long lost relatives or school friends reappear with their hard luck stories looking for you to help them out with your new found fortune.
Or of course, you may be tempted to give up your day job, buy a big expensive house or make other decisions that make your jackpot quickly disappear.
Which reminds me of a TV advert in the States a number of years ago by a financial institution called Nationwide Commercial that showed the rapper MC Hammer dancing outside a massive mansion, with lots of flash cars behind him singing his song “can’t touch this” and after 10 seconds the screen appears with a caption saying “15 minutes later” showing Mr. Hammer sitting on the steps outside the mansion with a big foreclosed sign alongside him.
You see it has been suggested that people who inherit or win money view it as found money rather money they earn and they are much more likely to use and spend it in a way they will later regret.
If you unexpectedly are in receipt of money regardless of the amount, before you make any splurges with it, you really need to take time to consider all the financial angles so you can come up with a solid plan.
When people come to me looking for advice as to what to do with their new found windfall, my first advice is fairly simple – do nothing – put the money in a safe place where you can get access to it if you need to.
You won’t earn much interest but what you are doing is giving yourself time and your advisor to come up with a solid plan for what you are going to do with it.
You see, people make rash and emotional decisions when they are in receipt of money, none moreso than if a windfall is the proceeds of a life assurance policy following the death of a loved one. Doing nothing immediately with it, will give you time to grieve before you make any big decisions.
I came across a woman a couple of years back whose husband died and she received a pay-out from a life assurance company in the amount of €350,000.
A couple of weeks after her husband was buried she was contacted by her bank who noticed the large lodgement in her account.
They invited her into the branch to give her advice as to what to do next, she was even assigned her very own “wealth manager” who didn’t seem to care that her husband had just passed away, and bombarded and confused with her this and that type of “portfolio” and this managed fund and that tracker bond.
The woman was in a daze and still in a state of shock from her husband’s death, and mistakenly took the advice of the bank far too soon with little or no rational thought and ended up losing a considerable amount of money investing in accounts that were not capital guaranteed.
So, if you are not accustomed to dealing with a large amount of money, the first thing you do, as I said already is nothing for at least I would say three months, and then when you are ready, get a group of trusted advisors who will be able to help you make the most from your new found wealth. And a good advisor is someone who takes the emotion out of financial decisions and who doesn’t agree with everything you say!
In some cases getting a good financial advisor in advance of a windfall – an inheritance you know you are going to be in receipt of in the future for example is a great idea.
A client of mine came to me a couple of years ago knowing she was going to receive an inheritance from her Grandmother before she died in October 2011, which gave us plenty of time to plan.
And when she received the inheritance in May 2012 we had a strategy laid out so she had a great idea about what she was going to do with it long before she even received it.
She knew what her tax liability would be, how much would be paid in inheritance tax, something many people forget, especially when part of the windfall i.e. gift or inheritance is liable to tax.
Let me ask you a quick question - what would you do if you won, say, €1 million? A large percentage of people I imagine would immediately say they would give up their day job, but believe me I have seen people do exactly that but underestimate the amount of money they need to replace their income.
If you earn €50,000 per year for example you would need to invest about €2.5 million if you don’t want to use any of the capital and just live off the interest.
And if you do quit your job, you will stop earning income and paying taxes that later contribute to retirement benefits – which you may in fact need if your investments go belly up or you spend too much.
Some people might use some of that €1 million to start a business or invest in someone else’s business, usually a friend or relatives, and this may not be a bad decision, but first you have got to make sure your financial house is in order.
For example, have your child’s education fund set aside, pay off high interest debt like credit cards (paying it off by the way will give you an immediate return of whatever interest you pay on the balance), have money in your emergency fund, clear off your mortgage and so on.
Do these things first and then invest money in a new venture provided you can afford to lose the total amount you invest, that is the risk you may be taking.
Subscribe or register today to discover more from DonegalLive.ie
Buy the e-paper of the Donegal Democrat, Donegal People's Press, Donegal Post and Inish Times here for instant access to Donegal's premier news titles.
Keep up with the latest news from Donegal with our daily newsletter featuring the most important stories of the day delivered to your inbox every evening at 5pm.