smart spending

4 steps to protect a windfall

Social circles -- the people who you hang out with in your socioeconomic sphere -- may change. People also may come out of the woodwork looking for a handout, children may demand more money, and family members or friends may feel resentful or become predatory, he says.

"Everything a person has spent decades building changes in one fell swoop," Pearne says.

He says that in his practice, he notices that about half the people who attain sudden riches spiral into self-destructive behaviors.

"This is because the existential question 'Who am I?' has suddenly changed by light-years," Pearne says.

When a windfall is the result of the death of a family member, it is doubly confusing, Bradley says. Grieving heirs may also feel guilty at being secretly thrilled about the money.

Psychological problems can arise if friends and family are unsympathetic to the stresses of new wealth and cannot help them with this unusual dilemma. Unlike other types of major transitions -- such as divorce, a move or death of a loved one -- the transition into money is not something that is seen as a "problem" by society, Bradley says.

"One of the classic mistakes (is that people) underestimate the power of the experience and the degree of change that happens," says Bradley. "It can be very isolating, and that's confusing because our society tells us that this should be a good experience.

Pearne suggests therapy -- ideally with a professional who has experience in the psychology of sudden wealth -- to help resolve some of these issues.

Step 3: Set aside play money

The money moratorium mentioned in Step 1 can help you sort out exactly how you feel about the money, and what you'd like to do with the cash, says John David "J.D." Roth, editor at the Get Rich Slowly personal finance blog.

That can prevent one of the worst mistakes associated with windfalls, Roth says.

"The biggest mistake people make when receiving a windfall is spending the money without a plan," he says.

Roth should know. He received a small windfall from an inheritance in 1995 when he was in his 20s and deeply in debt.

"The smart thing (I should have done) was to pay off the debt ... but I went out and spent the money on a top-of-the-line computer and books," Roth says.

In just a few weeks, all the money was gone, Roth says. He has since turned his entire financial situation around, and now saves aggressively and lives debt-free.

However, people who reap a windfall shouldn't necessarily avoid treating themselves, Roth says.

He suggests setting aside a small percentage of the money and using it to spend any way you wish. The amount should be small -- no more than 5 percent of the windfall total, he says -- and should not be spent until any debt and tax obligations are squared away.

Like Pearne, Roth suggests stashing the rest of the windfall into a CD for several months to let the excitement of being rich subside.

Step 4: Review after one year

Bradley documents three phases of sudden money in her book. She says the first phase encompasses a steep learning curve that can last for as long as five years, much like a grieving process.

"It is longer if the money was the result of the death of a loved one," Bradley says.

Although the adjustment to a windfall can take five years, it's wise to review your situation and make some decisions at the one -year anniversary of your financial upturn, she says.

The one-year review "is meant to keep people safe (and) focused, with room for changing their minds and making mistakes," she says.

Once you begin to become comfortable in your new financial reality, you may be ready for the successive phases, which include reviewing your situation and deciding how the money will be used, Bradley says.

This is the fun part, when you'll choose -- with the help of your trusted advisers and a solid financial plan -- whether to retire, buy a vacation home, donate to charities or set up trust funds for your children.

The ultimate goal of all these steps is to create a sensible plan for handling your windfall that also allows you to come out with your relationships and sanity intact.

"The whole point of process is to build a better sense of well-being -- (to) go through change and transition and come out better in terms of your family, security, vibrancy, as well as money," Bradley says. "Holding onto the money is only part of the equation."

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