MANAGING WINDFALLS: COULD YOU KEEP THE MONEY IF YOU WON THE LOTTERY?
Quote of the Week: “We`ve all heard stories of lottery winners, rock stars, heirs and professional athletes becoming millionaire morons who wake up rich but are broke by nightfall”~ Robert Kiyosaki
Wracking our brains over what to do about unexpected wealth is a problem we wish we had. It could be the lottery, a “golden handshake” from work, an inheritance from a rich relative or the grand prize in one of the many mega promotions that have now become a frequent occurrence.
Unfortunately, we have all heard of the paradoxical stories of individuals who go back to their former financial status or become worse off after winning big. Besides proving the fact that wealth is a state of mind, it cautions us to be prepared for the eventuality of having to manage a windfall to ensure we get the best out of it. If you don`t have personal financial management counselling to guide you, sudden wealth could quickly become a nightmare leading to the loss of not only money, but also health, family and friends. To ensure you are prepared for such an eventuality:-
Stand Still & Take Stock ~ You need to understand that the issue with windfalls is not money but the psychological capability to adjust to a sudden change in financial status. The shock of unforeseen windfalls often sets identity dissolution leading to irrational behaviour like giving all the money away, splurging on luxuries or hoarding it. Other symptoms of money shock include engaging in self-destructive activities like alcohol and drug abuse, and gambling.
According to the United States National Endowment for Financial Education Organization, an estimated 70% of people who receive windfalls often blow their fortunes within a few years. To counteract the powerful emotions you will experience, take stock of your feelings and self defining values. Psychological and financial counselling are critical in enabling individuals make prudent decisions after experiencing quick financial gains.
Take time to understand the psychology of sudden wealth. People need time to adjust to enable the “money shock” to wear off.
Psychologists recommend doing nothing with your money for at least a few months, if not an entire year, and avoiding extreme lifestyles changes like quitting your job. Park your money in a safe place where it won't depreciate such as a Unit Trust Money Market Fund, and take a holiday. This period enables you to discover, organize and explore the various investment opportunities available to you.
Earmark Play Money ~ Set aside a different account for your lump sum other than the usual one for daily transactions such as paying bills. Viewing huge balances in your account on a regular basis increases the chances of you going on a shopping spree. However, do not be too scared to enjoy your good fortune. Set aside some of your money, say 10% of the whole, for fun and expeditions to ensure you have memorable experiences you can attribute to the windfall.
Establish Annual Financial Reviews ~The lifestyle adjustment phase to a windfall can take five years. It is therefore prudent to review your finances annually and practice making decisions.
Growing comfortable in your new reality signals your readiness for successive phases like reviewing your financial situation and deciding how the money will be used e.g. buying a bigger home, giving to charity or setting up trust funds for your children.
Arming yourself with a team of trusted financial advisers and a solid financial strategy often makes all the difference. A successful transition enables you to you to come out with your relationships and sanity intact as holding on to the money is only part of the equation.