SUPPOSE YOU WON millions of dollars. How would you handle this good fortune? A ready response is: “Let me have the millions and I’ll show you.”
Actually, it is not as simple as that. In fact, it is exceedingly difficult to spend a windfall wisely without the assistance of independent professional financial advice. Some people who have experienced significant windfalls complain of losing friends and good family relations when they do not give such people part of the demanded windfall. Some friends and relatives just automatically expect a share in that windfall.
Judging from the history of the lives of some big winners, it is quite likely that you will go broke in the future given your windfall, rather than live happily ever after. A sudden large cash inflow, whether it is won or not, tends to give a false sense of wealth. Yet, it is important to mark in mind that income is not wealth.
The telling action will be what you do with that large cash inflow. It depends on how much of it you manage to retain for longer-term liabilities and contingencies. Your best move is to place the winnings in the bank and seek professional financial advice.
Your current financial condition, health situation and that of your dependents should guide how you spend or invest your winnings. Then, depending on where you are in your life cycle, the way you spend and invest your winnings will differ.
A young adult may want to invest in an education, whereas a mid-career professional may target debt repayment and enhancing his retirement fund. A retiree will have a completely different approach focusing mainly on his immediate cash needs and improving his estate.
Punters often talk of giving up their jobs if their bets pay off. This is more often than not a misconceived dream. There are very few cases where a grand prize winner can afford to give up his job. Month-to-month pay cheques are taken for granted. They cover the bills and keep us going. However, a computation of the sum of money to live a lifetime relatively comfortably will show that it can take a million dollars and more. And this is not considering extravagant living.
It is estimated that if your retirement income is $50 000 per annum, then you should aim to have a retirement fund of at least $500 000 in order to maintain you current lifestyle for another 12 to 15 years without worrying that you may outlive your money.
This estimate gives a sense of the amount of money it can take to live a lifetime. Furthermore, if a winner gives up working and either maintains or improves his lifestyle, the sum of money required to sustain him balloons.
Lump sums of cash are very attractive because one of the most enjoyable activities for most people typically is spending money. It can take a lifetime to accumulate a large sum; it can take a few days to spend it all in extreme cases. That is why the most important step any winner can take is to seek financial advice before spending or investing a cent.
A professional financial adviser will assist in balancing the spending and investing for you and your dependents given your particular situation. Guidance in making incremental improvement in your lifestyle can also be considered. Estate planning is another important aspect. If you never considered that you had enough before to fuss over in making a will, now you do have significant money to be worthy of a proper plan.
How do you invest a windfall? Based on advice, you do just that. Ensure that you invest a reasonable proportion wisely and enjoy spending the remainder. Good luck with your next bet.
• Louise Fairsave is a personal financial management adviser, providing practical advice on money and estate matters. Her advice is general in nature; readers should seek advice about their specific circumstances. Email: LouiseFairsave @nationnews.com
This column is sponsored by the Barbados Workers’ Union Co-op Credit Union.
