4 steps to protect a windfall

Highlights

• Financial windfalls can disrupt lifestyles and relationships.
• It's best to leave money untouched while adjusting to new reality.
• One-year review of situation can help keep newly wealthy on track.

It may seem like a problem you'd love to have: Deciding what to do with a sudden inheritance from a long lost relative or a big win in the lottery.

But, as the sad tales of some lottery winners clearly demonstrate, sudden wealth could quickly spiral into a living nightmare -- with the loss of not only wealth, but also family, friends and even health.

If you're lucky enough to receive a windfall, understanding the psychology of sudden wealth can help you take the right steps to protect your money and lifestyle.

"People think windfalls are about money. But it's really all about change and transition ... and people need time to adjust," says Susan Bradley, a Certified Financial Planner who is founder of The Sudden Money Institute in Palm Beach Gardens, Fla., and author of "Sudden Money: Managing a Financial Windfall."

In fact, unexpectedly getting as little as three months' worth of salary in one lump sum can set off a chain reaction of panic, guilt and fear for some, according to psychologist Dennis Pearne, co-author of "The Challenges of Wealth" and a wealth counselor and consultant based in Framingham, Mass.

"A person making $60,000 a year ... who suddenly has $15,000 plopped in their lap" can go into money shock, Pearne says.

Following are four steps that can help you adjust to a new financial reality after a windfall:

Step 1: Money moratorium

Bradley says such problems stem from the fact that most people don't understand the limits of their new wealth, especially if the windfall is relatively large.

"(The money) can be seem infinite ... people often get an 'I'm invincible, anything is possible' feeling," she says.

These powerful emotions may create trouble for those with new wealth.

To counteract these emotions, it's important to allow time to adjust to the new wealth circumstances that follow a windfall. Pearne and Bradley recommend that people who receive a windfall do nothing with their money for at least a few months, if not an entire year.

That means saying "no" to gifts for family or friends, new investments, lavish cars or house purchases, and trips around the world. It's not even wise to retire.

"Park your money someplace safe where it won't depreciate and take a money holiday," Pearne says. She recommends CDs as one possible home for the new cash.

Bradley says the money moratorium acts as a timeout that allows you to come to grips with your new financial situation and get your emotions under control.

"Emotionally, a windfall results in a stress reaction," Bradley says. "When people are in that state, they are using their reptilian brain and are prone to react rather than respond."

Taking a breather from the excitement of getting a lot of money -- and knowing you don't have to make any decisions right away -- can help calm emotions and set the stage for better decision-making, Bradley says.

During the money moratorium, there is a lot of work that needs to be done. While the money is safely parked in CDs for six months to a year, start to assemble a team of advisers you trust, including a fee-based financial planner, an estate attorney, a money manager who has experience with high-net-worth individuals and an accountant, Bradley says.

"This is a time to discover, organize and explore," Bradley says.

Step 2: Emotional inventory

After an especially large windfall, traditional work may become an option rather than a necessity; all the years of school training to get to a skill level are no longer necessary for survival.