We’ve all seen those movies where an attorney calls or sends a certified letter saying that some distant relative, twice removed, has passed away, and left you several million dollars. When the shock subsides and you stop shaking, you begin to wonder what you can do with this new found wealth. Financial planning usually isn’t at the top of the list.
Stories such as this aren’t that far fetched or as rare as we think. It does happen, practically on a daily basis to some degree, and the new found wealth usually disappears very quickly if the individual doesn’t seek proper financial planning.
Unfortunately, this seems to be more prevalent with lottery winners. A few years ago, I knew of one who won an out of state lottery and took a lump sum for several million dollars. After paying the federal and two states income taxes, he started the spending. He bought new Mercedes for the family and relatives, and three new expensive homes. He even went so far as to hire his niece who was in college, to walk behind him with a tape recorder to make notes of any ideas that popped into his mind.
Granted, this is an extreme example, but a true one, unfortunately. I believe this man’s money was gone in about a year, after many friends and relatives needed loans. If you came into an inheritance or some other large sum of money, what would you do? What do you think you should do? You really need good financial planning
Experienced financial planners say that you shouldn’t make any changes in your lifestyle for one year. A study of lottery winners has shown that they dash out and buy the usual expensive toys…sports cars, mansions, and even yachts. After that, motorcycles and jet skis are popular, and practically anything that goes fast or flies high.
Those in the financial planning field say that you should place these funds in an interest bearing time deposit. Then, even though taxes may have been withheld by the issuer of your check, you may still owe additional taxes. Meet with an accountant and calculate your federal and state (s) tax liability for the year, including all of your regular income and deductions. If you still have a balance due, you may be required to pay estimated taxes, but your accountant will advise you of this. Otherwise, set that amount aside to be paid with your tax returns.
Proper financial planning would also recommend that you repay debt such as credit cards as soon as you can. I can’t envision credit card interest rates now that have a low rate of interest. Mortgages with a low rate of interest can wait until you speak with a financial planner who will review your complete plan and make suggestions.
The next thing that you should do is to seek professional financial planning advice. This generally means a CFP (certified financial planner). You need to be aware that there are basically two types of financial planners, fee paid and commission paid. The fee paid planner will charge an hourly rate and the commission based planner will only get paid when you purchase securities or insurance products through him/her. Some advisers say that you should only consult with a fee paid planner, but I personally know a commissioned gentleman that I have complete trust and faith in that I would go to.
You have to use some common sense in this matter however. If your windfall is only a few thousand dollars, there’s not much point in paying for a financial plan.
At your first meeting with a financial planner, he/she will ask you for a complete listing of your assets and liabilities as well as the approximate values of each. They will also ask you what your short and long term goals are, as well risk tolerance in investing in various types of securities. Your retirement plans will also be discussed as well as your current lifestyle and future desires.
After a short period of time, the financial planner will have a formal financial plan all printed out for you, and will review it to be sure that all of your goals are being achieved. After that is done, you can begin to enjoy life. Take a part of the windfall and treat your family to a nice vacation or perhaps a new car that’s been on your wish list.
The primary emphasis is don’t go out and buy every shiny new item that you see. Plan and take care of your family’s financial future above all.