Your newfound wealth from a financial windfall comes with responsibilities and mistakes can be made if you don’t plan accordingly
By Jennifer Leathem, Special to Financial Post
Many of us have heard of a family friend or co-worker who receives a windfall, often unexpectedly. Perhaps you recently received a windfall yourself. You may have held shares of a private company that went public or sold your successful business after years of hard work and financial sacrifice. It could be the result of an inheritance or lottery winnings.
Other times, especially in major cities such as Vancouver and Toronto, your baby boomer parents may have decided to downsize and sell the family home for a significant sum, in turn, gifting funds so you can get a foot in the door of today’s housing market.
Most, of course, would consider such a sudden windfall a blessing, but it can also come with its fair share of responsibilities and challenges. The amount of the windfall and the circumstances will vary, but the questions raised are often the same.
Your newfound wealth comes with responsibilities and mistakes can be made if you do not plan accordingly. Here are a few common pitfalls when you receive a significant payout:
- Rushing into decisions such as leaving your job, moving to a new city or major purchases;
- Not enlisting the help of professionals like a financial adviser and accountant;
- Not having a financial plan for your long-term financial security, without which you could think you have more money than you do;
- Not planning for potential taxes owing;
- Receiving bad advice and making poor investment decisions; and,
- Going on spending sprees and splurging on unnecessary purchases.
These mistakes can happen to anyone, even those who are typically responsible with their money. To avoid such mistakes, first, slow down and take a breath. Don’t rush into making any major decisions right away. Continuing with your daily life for a period of time can be helpful in evaluating your goals. Take some time to consider what you want and how you feel about your newfound wealth. In other words, don’t quit your day job … just yet.
A sudden windfall is sometimes intentionally kept private for fear of resentment and expectations. If it’s made public, you may start receiving unsolicited advice on what you should do from people all around you. You may also feel pressure from others, including family members.
Before you start making gifts and handing out money, it is important to know to what extent you can afford to help others. What impact will the gifts you make have on your long-term financial security? If you help once, will you be expected to help more later?
My colleague, Tim Stranks, a financial adviser at Nicola Wealth, in our Ask An Advisor series recently discussed the things to consider when you come into a substantial amount of money.
Consider your short-term needs and goals
Set aside some cash for purchases you would like to make, such as a down payment on a home, or for goals you have, like helping other family members or charitable causes. You should also set aside any cash that will be required for taxes on transactions that have occurred. You can engage an accountant to adequately plan for this.
Determine your cash-flow needs
How much do you need from your investments to cover your lifestyle needs on an ongoing basis? Meet with a financial adviser who can develop a financial and strategic investment plan. Part of your plan will be to evaluate your risk tolerance and investment objectives. From there, you can look to build a diversified investment portfolio (which may include both private and public assets) that will support your monthly income needs and long-term goals.
Review your current debts
Look to pay off any high-interest loans and credit cards.
Everyone’s situation will be unique and objectives will vary from person to person. Enlisting professionals can help you through what could be an overwhelming situation and ensure that you achieve your goals and create a legacy for generations to come.
The extent to which you share information with your children is a very personal decision and we, as advisers, see both ends of the spectrum. Some clients keep their finances private and fear their children will become entitled if they know the extent of their parents’ wealth. Other clients choose to have their children involved in their affairs and family planning so they can ultimately handle the transition of wealth in the future.
Finally, talk to a professional therapist if you feel overwhelmed and stressed. Receiving a windfall will come with both positive and negative emotions, so speaking to a professional can help sort through any emotional issues you are facing.
To quote Benjamin Franklin, “if you fail to plan, you are planning to fail.” Taking the time to fully assess your financial situation, determining your goals, seeking qualified advice and setting your plan might not be the most exciting response to “what would you do if you had a million dollars?” but it will certainly ensure your new wealth will be available to you for years to come.
Jennifer Leathem, CFP, CIM, is a financial advisor at Nicola Wealth.