Introduction

Receiving an inheritance or a large cash settlement can be life-changing. It’s an opportunity to secure your financial future, support your loved ones, or even pursue dreams that were once out of reach. However, with great wealth comes great responsibility, and without careful management, what seems like a blessing can quickly turn into a financial burden. In this post, we’ll explore the key dos and don’ts when managing a windfall, as well as the grey areas that could become potential pitfalls if not handled with care.

The Dos

1. Do Create a Comprehensive Financial Plan

• Why: A financial plan is your roadmap to help ensure that your windfall is used wisely and effectively. It helps you prioritize your goals, manage your spending, and invest in a way that aligns with your long-term objectives.

• Action: Work with a Certified Financial Planner to develop a plan that includes budgeting, saving, investing, and risk management strategies tailored to your unique situation.

2. Do Pay Off High-Interest Debt

• Why: High-interest debt, like credit cards or personal loans, can erode your wealth over time. Paying it off early helps to ensure that more of your money is working for you rather than against you.

• Action: Prioritize paying off debts with the highest interest rates to reduce financial strain and free up cash flow for other priorities.

3. Do Set Up an Emergency Fund

• Why: An emergency fund provides a financial cushion in case of unexpected expenses or financial downturns. This fund should be liquid and easily accessible.

• Action: Set aside three to six months' worth of living expenses in a low-risk, easily accessible account, such as a savings or money market account.

4. Do Invest Wisely

• Why: Investing your windfall can help grow your wealth over time. Diversification and a long-term perspective are key to managing investment risk.

• Action: Consider a diversified portfolio that balances risk and reward based on your financial goals, time horizon, and risk tolerance.

5. Do Consider Professional Advice

• Why: Financial decisions, especially when dealing with large sums, can be complex. Professional guidance helps ensure that your choices are well-informed and aligned with your overall financial plan.

• Action: Regularly consult with financial advisors, tax professionals, and legal experts to make informed decisions and avoid costly mistakes.

The Don’ts

1. Don’t Make Impulsive Purchases

• Why: It’s easy to get carried away with sudden wealth, leading to unnecessary or excessive spending that can quickly deplete your funds.

• Avoid: Splurging on luxury items, multiple homes, or expensive vehicles without considering the long-term financial impact.

2. Don’t Ignore Tax Implications

• Why: Inheritances and settlements can have significant tax consequences. Failure to understand and plan for these can lead to unexpected liabilities.

• Avoid: Making decisions without consulting a tax professional who can help you navigate the complexities of estate taxes, capital gains, and other potential tax burdens.

3. Don’t Lend or Gift Excessively

• Why: Generosity is commendable, but lending or gifting large sums without setting boundaries can strain your finances and relationships.

• Avoid: Giving away substantial portions of your windfall without considering your own financial security or the potential impact on your long-term goals.

4. Don’t Overlook the Emotional and Psychological Impact

• Why: Sudden wealth can bring about significant emotional and psychological changes. Ignoring these can lead to stress, poor decision-making, and even financial ruin.

• Avoid: Making decisions in the heat of the moment or using your windfall as a way to cope with emotional challenges without addressing the underlying issues.

5. Don’t Underestimate Costs

• Why: It’s common to make lists of desired purchases, only to find that the true costs are much higher than anticipated, leading to overspending.

• Avoid: Creating a lengthy wish list without thoroughly researching the actual costs, including ongoing expenses like maintenance, insurance, and taxes. This can result in not having enough funds left for more important financial priorities.

Navigating the Grey Areas

1. Investing in a Business

• Grey Area: Starting or investing in a business can be a lucrative way to grow your wealth, but it also carries significant risks. Without proper due diligence, you might end up pouring money into a failing venture.

• Potential Pitfall: Having access to substantial funds can mask underlying problems in the business that would be apparent if you had to grow organically. Before investing, ask yourself if others would invest in the business. If the answer is no, take it as a warning sign. Carefully consider the market potential, competition, and your own expertise before committing significant resources.

2. Upgrading Your Lifestyle

• Grey Area: It’s natural to want to upgrade your lifestyle with a new home, car, or luxury items, but it’s easy to go overboard.

• Potential Pitfall: Gradually increasing your standard of living instead of making drastic changes can help ensure your windfall lasts. Always consider the long-term costs of maintaining a higher lifestyle before making significant purchases.

3. Supporting Family and Friends

• Grey Area: Helping loved ones is a noble intention, but there’s a fine line between supporting and enabling.

• Potential Pitfall: Set clear boundaries and consider setting up a trust or structured giving plan to help others without jeopardizing your own financial security.

4. Charitable Donations

• Grey Area: Donating to charity is a wonderful way to give back, but large donations can significantly reduce your financial cushion.

• Potential Pitfall: Consider the tax implications of your donations and whether you’re still able to meet your own financial goals before giving away a large portion of your windfall.

Conclusion

Receiving a large inheritance or cash settlement is a rare opportunity to build lasting financial security, but it comes with its own set of challenges. By following these dos and don’ts, and being mindful of the grey areas, you can navigate your windfall wisely and ensure that it benefits you and your loved ones for years to come.

Asset allocation and diversification do not guarantee a profit or protect against a loss in a declining market.

Information provided should not be considered as tax advice from GWN Securities, Inc. or it's representatives. Please consult with your tax professional.