March 2, 2021

Sudden Money and what to do with it

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“When I have a little money, I buy books; and if I have any left, I buy food and clothes.”

Desiderius Erasmus

Receiving a windfall from an inheritance, a legal settlement, a gift, or winnings naturally lends itself to exuberance. To receive sudden money is rightly a time to express joy and many find it difficult to contain themselves, often sharing their good news with friends and family such is the excitement.

Unfortunately, the majority of people are not prepared for the changes that such an event brings into their lives, their relationships with others, the emotional involvement thrust upon them, and crucially financial management obligations they must now navigate.   

History’s examples of lost fortunes

History is littered with examples of historical and present-day figures who had everything only to lose it all. Nikola Tesla, the namesake of the car company, the gifted physicist and inventor of the AC motor, lost his fortune in 1901 through an investment in a wireless electrical tower project. Boxer Joe Louis made a fortune during his career but had little financial advice and squandered it all, leaving behind a $1.25 million debt on his passing. Motown legend Marvin Gaye lost his fortune tragically through drug addiction.

Lost fortunes are not only the realm of private citizens, the 45th President of America, Donald Trump, went from making millions to bankruptcy on a number of occasions. If you think that was a confined case, one of his predecessors, the 18th president of the United States Ulysses Grant, lost his fortune through investing in a financial firm that later went bankrupt. So, as you can see, between poor investment decisions, addiction and poor or non-existent financial advice, money that is here today can be gone tomorrow.  

Time to take stock

The great Dutch scholar Erasmus, perhaps whimsically, thought it best to prioritise books over food and clothing. Despite his good intentions we would advise you to take a different route. The following steps will help you to enjoy yourself and keep your ‘food’ and ‘clothing’ priorities in check:

1. Take time out

Any sudden decisions you make are likely to be emotional ones and sound financial decisions are never driven by emotion. I did say enjoyment would be a factor in this process so taking a holiday when you receive such large sums to clear your mind would be of benefit.

2. Determine the Tax implications

It may be the case that there are none, either way, talk to a tax adviser to evaluate what portion is exempt and if it is deemed that tax may be due especially around gifting some further thought might be needed.

3. Engage A Financial Planner

A qualified Financial Planner such as a Certified Financial Planner™ gathers all of your essential information, family, personal and financial circumstances and answers the ‘what if’ scenarios for you. They assist in the construction of a financial plan that addresses saving, investing, protection, pension, and estate planning. Essentially a Financial Planner helps you to see the macro view of your finances.

4.  Create an Estate Plan

Establish a detailed Will with consideration for taxation and set up an Enduring Power of Attorney which is a legal document that allows an individual to appoint a specific person to look after your financial affairs in the event that you may be unable to do so due to mental capacity.

5. Pay off or pay down debt

Depending on the windfall size, the reduction of clearance of debt is one of those ‘food’ priorities we discussed earlier. Debt’s twin brother is often interest and the sooner you say goodbye to interest the better.  

The only book to prioritise is the one you bring with you on holiday in step 1. Let Aspire Wealth Management discuss your essential financial needs upon your return.  

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