Don’t blow your windfall

Sudden Wealth

Don’t blow your financial windfall

Don't blow your windfallYou’ve had a great windfall!

For many people, a sudden influx of money can be exciting and timely, but it can also be overwhelming and stressful.

This unexpected piece of good fortune may also come with a number of potential pitfalls. It can be tempting to start spending wildly, or to follow the first advice offered by a friend or family member. According to the National Endowment for Financial Education, 70% of Americans who receive a sudden windfall will lose it all within a few years.

If you are proactive in planning and preparing for this unexpected gain, you will not fall victim to these statistics.

Don’t be in a rush to start spending money

Whether your windfall comes from the sale of a business, a bonus, the sale of a home, an inheritance, or a lawsuit settlement, put the brakes on new spending. A financial windfall can cause you to feel richer than you are. Avoid developing overspending habits that can be hard to break later. Even a seemingly one-time splurge like a luxury car will continue to cost you in higher maintenance and insurance bills long after the initial purchase. Of course you can decide to use a small portion of the money to treat yourself. Just be sure to think about the satisfaction of having your funds last longer, and weigh the temporary pleasure of spending against your long term financial peace of mind.

Commit to a financial decision blackout period

A blackout period is a temporary amount of time during which you make no financial decisions. You should commit to at least a six-month time frame, during which you continue “life as usual”. Then, select a Certified Financial Planner®, such as a Vermillion Advisor, to help you plan for your future.

A blackout period provides anyone with a financial windfall all the necessary time to think about their values, priorities, and to clarify for themselves what it is they want to accomplish with their new financial resources. Making decisions before taking the time to gain this financial insight is a formula for disaster.

Seek Guidance

Before doing anything rash with a large sum of money, always review your financial picture. The best way to do this is by using the services of a Certified Financial Planner®, such as those at Vermillion Financial Advisors. In most cases, a CFP® will begin by completing a personal inventory of your financial resources which functions as a snapshot of all your key financial records. You and your Vermillion Advisor will be able to see your entire current financial picture.

An inventory also helps you see potential financial exposures or issues that will need to be addressed in order to achieve your long-term financial goals. Together, you and your Vermillion CFP® will then be in a better position to identify those goals, evaluate your willingness to accept investment risk, and create a long-term plan for your money.

Establish an emergency fund

Your windfall can immediately be put to good use. An emergency fund is a predetermined amount of money set aside for unexpected events. Establishing an emergency fund will be very helpful during your blackout period because it allows you access to cash while you plan for your long-term financial objectives.

Start with at least one month’s expense money in the bank to cover routine emergencies like car and home repairs. Ideally, you’ll want to eventually cover 3 to 6 months of normal expenses with a cash reserve. The sole purpose of this account will be to set aside enough savings to cover the necessary expenses of mortgage, car payments, utility bills, groceries, and other monthly obligations in case you’re ever in-between jobs or something unusual occurs. And, you will be prepared for any emergency.

Studies show that each year 10 to 20% of the average household’s income will be used for unexpected reasons such as a major repair. To be practical, emergency funds should be kept somewhere safe and accessible like a bank account or money market fund, and certainly not invested in anything risky. Consider this a very high priority.