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.

US Poll: What if you got a $10,000 windfall? © HieroGraphic/Shutterstock.com

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.

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

Alan Moore, founder of Serenity Financial Consulting in Shorewood, Wis., advises people who receive inheritances or large bonuses from work to set the money aside into a bank account that isn't used for day-to-day transactions.

"This way, you aren't seeing the money every time you log in to check your bank balance," he says. "Seeing a large sum of money every day makes you much more likely to spend it."

Lottery windfall not foolproof © HieroGraphic/Shutterstock.com

But that doesn't mean you have to avoid touching it altogether. Give yourself permission to celebrate by spending some of the cash doing something fun.

One rule of thumb is to earmark 10 percent of your cash as fun money. But, Moore says, it depends on your situation, and the size of the windfall.

"I do think that windfall recipients should spend some of the money on themselves," he says. He recommends taking a vacation as a great way to spend the money.

"Anything that is going to lead to memorable experiences is likely going to be better than buying more stuff," he adds.

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.

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," Bradley says. "Holding onto the money is only part of the equation."

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