BY RUTH MAHONEY
People come into money in various ways,
from happy winnings to uncomfortable settlements. For visitors of the 147th Saratoga Meet
at the Saratoga Race Course, big money hopes
hinge on hitting the Pick 6 with a couple of
long shots. You never know. It happens–even
if you pick your horses because you like their
name or color.
In fact, on September 2, 2010, four ticket
holders selected the winners of each of the
Pick 6 races and received payouts of $377,883.
Regardless, whether your windfall comes
from a legal settlement, insurance claim, inheritance
or horse race winnings, the burden
of an unexpected lump sum of cash will likely
be heavier than you realize. The reason: most
people treat windfalls different than earned
money, and the resulting outcome too often
is a loss of wealth, strained relationships and
increased financial and mental stress.
The issue most people face when they come
into money is they don’t know what do with it.
Unlike the income we earn, we don’t have a
plan for windfalls. It’s not part of our budget, so
it’s easy to think of it outside the scope of our
day-to-day expenses and long-term financial
goals. This is the mistake. When newfound
money is not part of our plan, it’s easy to spend.
It’s also easy to overestimate its true value.
Press pause on the payout . . . and plan
The best “first” thing you can do with a financial
windfall is nothing. Exercise financial
discipline. Put the money into a savings account
or money market fund until you develop
a plan for what you want to do with it. This will
allow you easy access to the funds if needed.
Another option is to set up a short-term CD.
The next thing you should do is assemble a
financial team who can help you minimize tax
liability and coordinate the construction of an
investment portfolio that integrates with your
short- and long-term financial goals. This team
should consist of a certified financial planner,
certified public accountant, estate planning
attorney and an insurance professional. Their
primary role is to help you make informed
financial decisions. It is important that you
take the time to interview your team and be
comfortable they are a fit. Remember, they will
be working for you.
While each individual situation is unique,
there are some guidelines you should consider.
Five for fun. It is a windfall, after all, so
splurge–but only a little. Limiting yourself to
spending less than 5 percent of your windfall
will protect you from reckless financial decisions
that can have serious long-term ramifications.
Any niceties beyond that initial 5 percent
should fit into your strategic financial plan.
Don’t check out. As strong as your desire may
be to quit your job, carefully think it through.
Is the windfall really enough to replace the lost
income, Social Security and possible health
benefits you’ll be walking away from?
Pay off debt prudently. It will be tempting
to use your windfall to pay off your mortgage
or your child’s student loan, but it shouldn’t
be your priority. Your overall financial health
should come first. Repayment of debt obligations,
including credit cards, should be
accounted for in your financial plan. Also,
before you start paying off your debt, set aside
a six-month emergency fund.
Prioritize long-term security. Define your
life goals. Maybe you can’t call it a career, but
perhaps you can be happier and make more
money by changing careers. Investing in more
education could provide you with a good return.
Also, goals establish benchmarks for evaluating
the performance of your investment portfolio.
Looking ahead also helps you define and mitigate
risk based upon your desired outcomes.
A helpful exercise you can undertake is to
create a spreadsheet of how you might like to
allocate your windfall. Include categories such
as retirement, long-term savings, short-term
savings, emergencies, fun, charities, etc. It’s
a process that will help you think about your
windfall more responsibly and will provide your
financial team with a good overview of your
values and goals.
Execute your plan
Financial windfall or not, the key to financial
security is to develop a plan and execute
it. A financial windfall definitely presents you
with more opportunities, but leveraging it for
financial independence is not without pitfalls
and does not provide a guaranteed outcome.
That’s why it is important to work with your
financial team to develop a plan you can live
with. With their help, the decisions you make
regarding your career, retirement, real estate
transactions, charitable giving and estate planning
will be sound and informed.
As you move forward through life, it’s important to understand that your plan is not static.
It needs to be a living, breathing strategy that
evolves as you grow. It also needs to adapt with
and adjust to the demands of future market
conditions. Your financial team should meet
with you at least annually to ensure your goals
are still being met.
At the end of the day, a financial windfall
is a blessing. Whether it’s $10,000, $500,000
or $10 million, it should not be the curse that
too often it becomes. It’s an opportunity, and
proper planning–aided by a skilled financial
team–can help you leverage the opportunity
into something that improves the overall wellbeing
of you, those you love and even the causes
you care most about.
Mahoney is president of KeyBank’s Capital
Region.
Photo Courtesy KeyBank