Sudden windfalls: More money, more to lose

Receiving a financial windfall can be a life-changing event, and for the nearly one-third of U.S. households the Bureau of Labor Statistics says will inherit wealth, it often is.

However, the ugly truth of sudden wealth, according to the National Endowment for Financial Education, is that 70 percent of people who come into it are broke within a few years.

Whether it is an inheritance, lottery, legal settlement, bonus, pension, sale of a business, severance, etc., when there’s more money, there is more to lose. Here are ten critical steps to follow to help you preserve your sudden windfall.

1. Take a time out. Most financial planners advise waiting a minimum of six months before you do anything with your windfall. Deposit funds in insured bank accounts to ensure safety. This will give you time to come up with a solid plan for how you will use the money.
2. Protect your privacy. As tempting as it may be to shout it from the rooftops and throw a huge party, keep it to yourself as much as possible. 
3. Assess your financial situation. Before you make any sudden decisions, take time to understand your financial profile, including assets, debt, retirement savings and income needs. 
4. Assemble a support team. Seek professional advice on taxes, planning and legal matters. Your team should include a financial planner, certified public accountant and financial advisor. You may also need assistance from a lawyer and/or insurance professional. 
5. Evaluate your short- and long-term goals. Clearly defined, achievable goals serve as the foundation of a strong financial plan.
6. Strengthen your safety net. Review your current liability, property and casualty and life insurance coverages to ensure you have coverage commensurate with your increased wealth. 
7. Expect the unexpected. It is especially hard to say no to people close to you. Know how you are going to deal with these situations in advance. 
8. Take 1 to 5 percent to treat yourself and your family. Once your team is in place, plan is in place and taxes are paid, it’s okay to do something special—guilt free—if you do it modestly. 
9. Make your money disappear. Keep at least six to twelve months of living expenses available. Put the rest in investments and other savings vehicles.
10.  Keep true to your plan. Don’t forget who you are, and keep sight of your long-term goals. Stay active in planning discussions and reviews. You play an integral part of keeping your windfall—and financial future—intact.

Frequently asked questions

Should I pay off my credit cards? Usually it is smart to pay off accumulated credit card debts. This type of debt has no benefit for you over the long term, and the interest rates are typically higher than any returns you can expect from investments.

Should I pay off college loans? Experts say usually not. The interest rate is low, the interest may be tax deductible and the payment schedule is flexible. So this debt is usually painless to carry. You may be able to put your windfall to better use.

Should I pay off my mortgage? Again, the advice is generally no. Your mortgage is a low rate, tax deductible debt. Paying it off locks up your money in your house—an investment that usually requires time and money to sell. You may be better off putting your windfall into liquid investments and earning a higher rate of interest.

What if I receive a windfall before, during or after my bankruptcy? It is very important to let your bankruptcy attorney know immediately if you know you are going to receive or do receive a windfall. The type of bankruptcy filing will determine the extent to which the windfall will affect your bankruptcy.

What if I receive a windfall while I am separated or going through a divorce? Depending on the type of windfall, the timing and the state you live in, you may or may not be required to share this windfall. You would be well served to speak to a family law attorney well versed in your particular state’s laws.