Guest Post by Clarence Mulcahy
Many of us live paycheck to paycheck. We have years of experience dealing with unforgiving budgets and do our best to stay above water. So if a large amount of money falls in your lap—through an insurance settlement, inheritance, or lottery win—you may not know what to do with your newfound fortune. Because many people lack experience handling a healthy bank account, they often end up losing their fortune as easily as it came to them. What can you do to protect a current or future financial windfall?
Breathe—and Don’t Let the Money Go to Your Head
Remaining grounded is incredibly important. Many lottery winners and recipients of insurance settlements and inheritances lose their fortunes because they go on massive spending sprees without taking a step back and asking themselves if what they’re doing is smart. Often, this happens because they feel the need to make up for experiences and material items they missed out on prior to their windfall. When lottery winners are asked what they’re going to do with their jackpot money, they often talk about luxury vehicles, over-the-top mansions, and expensive holiday vacations. Because the money wasn’t earned through employment, it can be easy to spend without thinking.
Do the Math
If you work 40+ hours a week for a paycheck, you tend to be more careful with your money because you’ve invested time and effort to earn it. The best thing you can do when you inherit a large sum of money is, simply, the math. Take your fortune and divide it by your current monthly salary. Let’s say you currently take home $2,500 each month and—surprise!—you just inherited $1 million after taxes. That overnight fortune is equal to 400 months of pay—more than 33 years of work! By all means, splurge a little, but keep in mind what that money really means. Having funds to pursue your life goals, enjoy early retirement, and invest in your children’s futures is likely going to be more important to you than the latest top-of-the-line Audi or staying in five-star hotels.
Stay Anonymous If You Can
Depending on state disclosure laws, some lottery winners may not be able to remain anonymous. However, if you have that option, take it. You may be a trusting person, but telling the world about your big jackpot or inheritance is an even bigger mistake. Suddenly everyone will want and “deserve” a piece of that pie. After all, they say, it’s not like you earned it. Many lottery winners claim to have lost friends and family because of constant harassment and bullying over their money. If you have good friends and close family who are in need, you should be generous, but you don’t need to go into specifics. If someone has a leaky roof, you don’t need to say, “Hey, I just won the $126 million Mega Millions jackpot! Here’s $5,000.” Note that depending on your state, you definitely need to disclose new property and wealth to your spouse. Consult an attorney and accountant for all legal and tax issues. Speaking of which…
Hire a Lawyer
Depending on income and estate tax laws (which change yearly), the amount you win in a lottery jackpot or receive through an inheritance may be heavily taxed. Insurance settlements for bodily injury and property damage are not usually taxable income. Confused? You’re not alone. That’s why it’s important to hire a reliable and professional attorney, accountant, and wealth management advisor. Having professionals handle tax and legal questions will save you a lot of hassle and money in the long run and, hopefully, make you more money through successful investment advice and strategies.
Take the above steps when you receive a windfall in any form and you’ll be on a healthy and positive financial path for years to come.