Suddenly coming into money can be overwhelming to handle. A large windfall can make you feel like you have financial freedom, but with that freedom comes responsibility. Time and time again, lottery winners and professional athletes have spent beyond their means, using up all of their new wealth within the first few years of receiving it.
When you receive a large inheritance, win the lottery, or sign a pro-sports contract, you are acquiring wealth under unique circumstances. Most people get paid bi-weekly, never receiving such a large lump-sum of money at once or having the spending power that you do. Knowing how to handle your windfall responsibly is vital to making it last. Here are the first steps you need to take to secure your wealth for the long run.
- Take an Inventory of Assets and Liabilities
The first step to handling your finances is understanding what you have and what you need. List out what liabilities you have, such as: student debt, credit card debt, or a mortgage. After making your list you can prioritize which debts need to be paid first and outline how much of your windfall will need to be allocated to funding these liabilities.
- Pay Down Debt
Your next step is to pay down your outstanding debt. Take care of any time-sensitive, high-interest rate debt, such as bank loans or credit card debt. These payments are essential and once they’ve been made you can organize your financial plan accordingly. However, certain types of debt with long-term payment plans (like a mortgage) shouldn’t be paid off early, in fact it will cost you, so make sure to do your research on what kind of debt you have.
- Avoid Making Impulsive Extravagant Purchases
When you receive a large sum of money it seems like you can afford to buy whatever you want. Although you may have received a lot of money, it doesn’t mean it will last you forever. With the excitement of receiving a windfall, your rationality can be overpowered by your emotions, and emotional purchases aren’t always in your best interest. You should be cautious about making any impulsive, extravagant purchases, as well as any long-term decisions (like buying a house) for when you are in a less emotional state of mind and you have a better understanding of your long-term financial plan.
- Consider your Life Goals and Objectives
Keep in mind, when money changes, life changes, and this windfall may very well alter the way you view your future. You may want time to think over how your money will shape your career and lifestyle. You might want to ask yourself, “what are my goals and ambitions in life, and how can this money help me achieve them?” Financial security can be liberating and you may want to pursue things that you weren’t able to before. It’s beneficial to sit down and map out your short-term and long-term goals and assess how your new wealth will play into your plans. You may want to spend, invest, and save differently depending on what your goals look like.
- Meet With a Financial Advisor
Now that you have your goals mapped out, it’s time to meet with a consultant and crunch numbers. You should meet with a financial advisor and discuss with them your goals in life. Meeting with a financial advisor is vital to securing your wealth and actively planning what your wealth can do for you. Too often people who receive a windfall are blinded by the money and spend it as if it will never run out.
As financial advisors, we understand the reality of money management and how easy it is for people to spend away their windfall if they don’t have a plan. Being proactive and meeting with a professional is the first step to securing your wealth. One meeting can help you make the most of your windfall.