Quick -- imagine you inherited $100,000 from a relative. Or you won the lottery. After jumping for joy, what would you do?
That question could well determine the fate of your fortune, but far too many people act hastily and get it wrong. The pitfalls of spending too much are obvious, but maybe less obvious are the drawbacks of investing too conservatively. What with the highest CD rates and bank account yields averaging 2 percent or less and inflation marching along at 3 percent, you can see how quickly your dreams of living large could evaporate.
Certified Financial Planner Susan Bradley, author and founder of The Sudden Money Institute, in Palm Beach Gardens, Fla., counsels clients who receive a windfall or go through any financial transition (via inheritance, lottery, divorce, court settlement, etc.) to take a timeout from making immediate decisions. "Make yourself a one-page organizer with three blocks: now, soon and later." Now is for the items that are urgent, like paying a mortgage about to go into default. Soon is for important -- but not pressing -- items, and later is for goals that take time to organize and plan.
Step two is to prioritize items in each of the blocks. This is important because "the new money might give you the opportunity to be able to do anything you want, but not everything you want," Bradley cautions.
The bottom line, according to Carlo Panaccione, founder and president of the Navigation Group, in Redwood Shores, Calif., is that a financial windfall shouldn't change your life, but it should make it better. In other words, the money shouldn't affect your core values and lead you to try to keep up with the Joneses, a losing proposition for sure. Instead, you would be wise to revisit what you are trying to accomplish in life and determine how the money can help you attain your goals.
"It's very easy to implement ideas and figure out the planning later," he says, "but every decision to spend money is a decision not to spend on something else. You want to stop and ask why you're doing these things -- is it for retirement, or to pay education costs for your children or to be free of worry?" Once you've answered the basic questions, you will be more logical in how you decide to use the money.
In my next blog, I'll address the opposite circumstance -- what should you do when you experience a sudden reversal in wealth? In the meantime, write and tell us how you would handle a financial windfall.