What to do (and not to do) with a financial windfall

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Anelisa Mti, Advisory, Partner Citadel
Anelisa Mti, Advisory, Partner Citadel

Who hasn’t dreamt of receiving a sudden cash windfall? A large lump sum that swells your bank balance overnight and makes all your money troubles disappear. Or does it?

Becoming instantly rich, or even receiving just a healthy boost of cash, can bring many more problems than it solves, warns Citadel Advisory Partner Anelisa Mti.

“People often focus more on short-term objectives when they receive a sudden lump sum of money, as opposed to having built it up over time,” says Mti. “If it is much more than they are used to dealing with, they might not comprehend the money running out. And sadly, if they do not handle it well, it mostly does.”

A windfall can arrive from several different sources – an inheritance, a lottery win, a policy pay-out (such as for a disability or critical illness) and even a divorce. In each instance, the pay-out is loaded with emotions which may cloud one’s judgment and render decision-making harder.

“When inheriting, for example, you are generally going through a mourning process, and you may also be concerned about how that person would have wanted you to handle the sum left to you,” she explains.

“In the case of a lottery win, you will generally experience a sense of euphoria and perhaps some disbelief. But whatever your emotional state, you are in danger of it clouding your judgment and perspective, which can lead to bad decisions.”

Not only that, but you will find many people emerge from your past – family, friends and even foes – who will try to stake a claim on your new-found riches. And it will be hard to say no. “Trying to please others is another quick route to losing your capital,” cautions Mti. It is worth noting that nearly a third of lottery winners eventually go bankrupt and most inherited wealth is lost by the second or third generation.

When it comes to policy pay-outs, the need to preserve the capital is even more important as the recipient might need to survive on that sum for the rest of their lives.

“People who receive a disability lump sum should also realise that while these funds can provide for immediate requirements, they still need to make provision for their retirement out of the capital,” she explains. “Too often people use the payments for short-term needs in terms of change of lifestyle and then find that they have insufficient funds, or even nothing left, when they need it most.”

What to do

Mti offers six suggestions of what to do to avoid the pitfalls of landing a windfall, to ensure that you are able to maximise the opportunity to provide for your retirement and leave a legacy:

  • Take a cooling off period: First, you should do nothing. Allow the idea of the wealth to settle and simply consider various options but, importantly, take no decisions at this stage. What you will do with the cash will depend on the quantum of it, what your current life stage is and what your family and personal needs are.
  • Speak to a professional (or several): At the very least, you need to involve the help of a financial advisor, someone who can advise you independently on using the money to reach your financial goals as effectively as possible. You may also want to speak to a lawyer to discuss leaving a legacy, and possibly a psychologist who might assist you to come to terms with your emotions with dealing with the new-found money.
  • Keep it private: If at all possible, keep your new riches to yourself. This will help to overcome some of the potential negatives – such as requests for handouts or expectations from those close (and even not-so-close) to you to share your good fortune with them. If it’s not possible to keep it private, you could divert all requests for money to your lawyer.
  • Pay off debt: Use this opportunity to pay off as much debt and loans as you can, working together with your advisor on this. Paying off debt also means lower interest payments on that debt, which is like saving in reverse.
  • Set objectives and make plans to meet them: Taking into account your current life stage and family needs, consider both short-term and long-term financial objectives. For example, you may wish to provide for your children’s education, or ensure that your parents have a comfortable home. You need to consider what purchases you would like to make, such as homes and vehicles. Then you should look at your retirement, and the amount of income you would like to be generating – even if you expect to never have to work another day in your life. Insurance policies need to be taken into account, including medical cover, and an emergency fund too. Make a list of everything before you spend a cent. Then sit with your financial advisor to decide the optimal way to achieve those objectives and strategise on getting there.
  • Allow for some short-term gratification: Have some fun with the money. Do let yourself enjoy some of it now, but make sure that you have planned for this. You might also want to include some gifting as a part of your spend – whether it is to friends and family, or to charities. If you are able to, and have chosen to, remain anonymous, your donations can be made namelessly. However, be absolutely sure that gifting has also been included in your financial plan.

What not to do

Mti also has some useful recommendations of what not to do on coming into a large sum of money:

  • Don’t gloat or boast: This will lead to people knowing about your new-found wealth.
  • Don’t be in a hurry to give the money away: Sometimes people, even subconsciously, feel they don’t deserve the money and end up either giving it away or frittering it away. Don’t let this happen to you. Your windfall can change your life for the better, if you let it.
  • Don’t ramp up your lifestyle: It might be very tempting to expand your lifestyle with a sudden cash injection, but once you start on that path, it’s hard to stop. It’s best to stay as grounded as possible.
  • Don’t quit your job – at least not immediately: Especially while you are still planning what to do with the cash and getting used to the idea of being wealthy, keep everything as normal as possible, which includes staying in your job.

“A financial windfall can be the answer to your dreams,” says Mti. “Protect it and yourself, invest the money wisely and ensure that it can be used to provide you with financial freedom. Don’t allow yourself to become hoodwinked by unscrupulous operators or hangers on, and you and your heirs will be able to enjoy its benefits for a very long time.”

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