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Imagine you had a fortune

By Judy Martel · Bankrate.com
Wednesday, June 9, 2010
Posted: 12 pm ET

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.

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3 Comments
Kit
June 10, 2010 at 12:23 pm

The article points out that cd rates are 2% or less and inflation is 3%. It doesn't give any alternative "low risk" investment ideas that earn more than the inflation rate! Come on! Tell us a safe investment that earns over 3%!

Lindsey
June 10, 2010 at 12:12 pm

It depends on how much of a windfall there is. Anything short of 2 or 3 million and I'd just pay off debts, upgrade my yearly vacations a little and sock the rest away in some kind of retirement account until I could retire (I'm 25 so 2 million probably wouldn't let me retire now).

If I won the lottery and got 10+ million I'd probably upgrade my house and cars a little, figure out how much I want to spend each year on whatever lifestyle I choose and from there figure out when I could retire.

Marlene
June 09, 2010 at 1:19 pm

Actually...this just happened to me. I inherited some money. Me being a "non-financial wizard" just met with a financial planner yesterday regarding "where" to put the money to gain more interest than a typical bank account will provide.

I really don't think my "core values" have changed because the amount of money is a nice sum, but not enough to just spend away on anything without really thinking it through. I'm pretty grounded in this way.

I do like your suggestion of the one page organizer of now, soon, and later. i will put that suggestion to good use.

I guess because I grew up with parents who had to work for everything they got and did not spoil me (I'm 50 now)...I never was brought up to "keep up with the Jones". My parents income was low...but they were happy. I don't expect this "extra" windfall to bring me happiness. But it will certainly make things easier on me (financially). Happiness comes within. I guess I can thank my parents for teaching me right!