Your chances of winning it big in the lottery may be about the same as getting struck by lightning, but there are plenty of other, more common, ways that you might suddenly find yourself managing a large sum of cash. It might be an inheritance, insurance proceeds, the sale of a home or vacation property, a severance package, or divorce settlement.
While it might seem like a nice problem to have, people often run into difficulties. Some might launch into a spending spree while others freeze, not knowing what to do. If you are ever find yourself in this situation, here are some basic guidelines to follow.
1. Park and plan
Though it might seem counterintuitive, the first thing to do is…nothing. Rather than rush into decisions you might regret later, take time to gather your ideas — and those of your spouse and any other family members — about the various ways you wish to spend or invest the funds.
While you’re discussing your options, park the funds in one or more vehicles that will provide reasonable interest while maintaining accessibility. Once your ideas are assembled, sit down with your advisor and develop a financial plan together.
2. Reduce debt
One area you might consider is to erase any credit card balances or personal loans that carry a high rate of interest. Paying these off reduces your overall interest costs and frees up your money for other goals.
You may want to pay down or pay off your mortgage, if you can do so without incurring a prepayment penalty. Many people prefer the financial freedom of being mortgage-free, particularly heading into retirement.
3. Revisit your risk profile
Receiving a windfall can affect your risk profile in a number of ways. For example, with money behind you, you may be able to lower the risk level of your portfolio because you no longer need to seek as high of a return.
On the other hand, it may give you the financial freedom to pursue more aggressive investments, because the windfall allows you to better withstand any volatility.
4. Consider your life goals
Depending on the size of the lump sum, some of your goals in life could change. For example, you might launch a business you’ve always dreamed about, buy a vacation property, move up your planned retirement date, or take the trip of a lifetime.
5. Revise your estate plan
Coming into a large sum of money may have a marked impact on your estate plan. You may need to revise your will to include a financial legacy for your children or a charity. Depending on your objectives and the size of your windfall, one or more trusts may be needed as part of your estate plan.
Your advisor can help you review your options, clarify your goals, and determine priorities. Whatever route you take, they can help ensure that your funds are appropriately managed in line with your desires.