We all dream of coming in to some money, whether a pension payment, winning lotto or receiving a sudden and unexpected inheritance from a rich great-aunt twice removed (whom we never met), and we all like to imagine what we would do with the money – gifting some of it to family is right up there – but back down to earth, what is the best way to handle a sudden large amount of cash in your bank account?
A cash windfall, no matter how small or big or where it comes from – lotto, superannuation, inheritance, the sale of a business or house, a court settlement – is not finite. Like a full tank of gas it will run out if we’re reckless in our handling of it.
The fact that many lotto winners end up broke is no myth.
UK lottery jackpot winner, Callie Rogers, today works as a maid because she blew $US3 million on shopping, cocaine, plastic surgery and friends. Sharon Tirabassi won $US10 million in lotto too. Nine years later she was working part time and catching the bus to work so she could make rent payments.
Finance magazine site MarketWatch reports that Researchers from the University of Kentucky, University of Pittsburgh and Vanderbilt University analysed 35,000 lotto winners in Florida's Fantasy 5 lottery from 1993 to 2002, and found 1,900 winners went bankrupt within five years.
The researchers surmised that financial literacy was an issue, as was their attitude more reckless to winnings than it may have been to earnings.
According to Dr Ronald E. Riggio, Ph.D. in the article ‘The pros and cons of winning a fortune’ which appeared in Psychology Today magazine, the decision to remain in your job after a windfall may actually contribute to you staying happy. But that aside, he says, the biggest downside to a large windfall is stress.
Demands and advice from family and friends, fear of losing the money again and a flood of people asking for money or offering their services (even financial predators) can leave the suddenly wealthy panicky, unhappy, stressed and confused.
“The most successful winners stay grounded and maintain their perspectives. They are prudent, and do not engage in reckless spending or behaviour. They plan next steps and seek help from trusted investment professionals. They use the money to improve their lives and those of their loved ones. They realise that the most important aspect of winning the lottery is the freedom from financial pressures and the opportunities provided from additional resources,” Riggio says.
Most experts agree however, that there are some practical steps you may want to consider in the event of a windfall:
- Take a break. Give yourself some time to pause, take stock, think… get used to the thought of having all that ‘extra’ money. Do nothing for as long as possible, to avoid acting on impulse.
- Tell as few people as you can;
- Retain a team of expert, professional advisers (e.g. a financial adviser, lawyer, accountant and tax expert). People who are properly registered and bound by a code of ethics will be able to give you advice and assist you in making the right decisions.
How you invest the money, or how you budget or apportion your windfall, is best determined with the help of independent advice, but without question the biggest challenge of sudden money is the stress it will cause you and those around you.
Now that you have the money, you can afford to pull in resources to support you and help you make a plan that is best for you and your family. For more information, visit our windfall or inheritance page here.