Handle Sudden Wealth

If you have never managed a large sum of money before, it is much easier than you might think to squander your newfound wealth. Before you go on a spending spree or stuff the entire amount into your mattress, it’s crucial to pause and instead prepare a comprehensive plan to handle your new financial reality. Taking a calm and measured approach can help you to avoid common pitfalls and to make the most of your resources in the long run.

Traps To Avoid

HBO’s new football comedy “Ballers” focuses on Spenser Strasmore, a former NFL player turned financial adviser, and the pro athletes he advises. While the show incorporates all the heightened drama you would expect, the struggles with financial stability it depicts are all too real. And it isn’t only football players who run this risk. There is a long list of lottery winners who burned through large winnings in a few years, and 70 percent of affluent families lose their wealth by the second generation, according to the Williams Group wealth consultancy. Conspicuous consumption is the default answer, and sometimes spending unwisely is indeed the culprit. But while it is easy to judge football players who buy huge mansions and young adults with outsize tastes for designer shoes and the latest Apple gadgets, the reality is that people suddenly handling much more money than they are used to can easily fall into the trap of believing their newfound wealth will never run out, no matter what they do.

Making A Plan

So if planning is the best way to avoid the pitfalls of sudden wealth, where should you begin?

First, you should assemble a team of professionals. One of these should be a fee-based Certified Financial Planner (TM) who is transparent about his or her compensation. This helps to ensure your adviser’s interests are aligned with yours. You may also want to consider a separate accountant or tax expert and a wealth manager, depending on what services and expertise your adviser offers. An estate planning attorney will also be helpful.

Once you are satisfied with your advisers, the next step will be to determine whether your windfall has tax implications. While an inheritance or life insurance proceeds are not typically taxable, an exercise of stock options, the sale of appreciated stock and a lottery payout are all taxable events. Your accountant will be able to tell you whether you owe taxes, and if so, how much your total tax bill will be and when it will be due.

After setting aside the portion to cover taxes, a logical next step is to consider your debt. In most situations, it will make sense to pay off any outstanding “bad” debt right away. What makes debt bad? Generally, it is when you use debt to buy something that immediately decreases in value.