Published in: Banks | March 12, 2019
What to Do (and What Not to Do) When You Come Into a Large Sum of Money
By: Lyle Daly
It seems like a dream come true, but a sudden influx of cash can also bring all kinds of new challenges.
Image source: Getty Images.
Coming into a boatload of cash -- awesome. Spending it all, and then wishing you’d done things differently -- not so awesome.
We’ve all read about Lotto winners who went bankrupt. It seems crazy, and it’s easy to say, “That would never be me,” but the truth is that suddenly having a large sum of money is a unique situation that most of us are unfamiliar with. There’s plenty of advice out there on making and saving money. Once you actually have money, people assume you’ve got it made.
Whether you inherited money, won the Lotto, or had a hot streak at the casino, here’s how to avoid squandering your newfound wealth.
Do pay off your debt
It’s not the most exciting way to spend your money, but it is the wisest. When you have more money at your disposal, the best way to use it is to pay off your debt so that you can stop paying interest.
Prioritize high-interest debt first, such as credit card debt. Then, if you have enough funds available, you can start paying off some or all of your debt with lower interest rates, such as student loans or mortgages.
Don’t tell the world
As excited as you may be, don’t tell everyone about your good fortune. If you have a spouse, you should tell them. You may want to inform a few trusted family members, such as your parents. Other than that, you’re better off keeping your news to yourself.
When you overshare, you make it more likely that you’ll suddenly have dozens of long-lost cousins and friends coming out of the woodwork hoping you’ll share the wealth with them or invest in their business ideas. You’re also at a greater risk of theft when people know you have money.
Investing can mean the difference between having your money last you the rest of your life and being back to square one in a few years’ time. It’s the most-effective way to grow your money, and depending on how much money you have, you may be able to invest it and live off the return.
The key to intelligent investing is minimizing your risk. Index funds are a popular way to do this while still getting a solid return for your money. Many of the best online stock brokers also offer research that can help you make smart decisions with your investments.
Don’t radically change your life
Resist the urge to do any of the following:
- Dramatically quit your job
- Buy an expensive new car or boat
- Upgrade to a luxury apartment or house
Basically you want to avoid going the MC Hammer route. Keep your lifestyle the same so you don’t rack up unnecessary new bills. If you do want to make any changes, give yourself at least a few months so you’re not making a snap decision.
Do figure out a plan
To avoid wasting your money, you need to come up with a plan on how you’re going to use it. This will depend on how much money you have, where you are in life, and what your goals are.
You may want to consult with a financial advisor to help you with this. Not everyone needs a financial advisor, and most can get by without them, but it’s different if you suddenly have over $100,000 and no idea what to do with it. Just make sure you research advisors to find one who’s reputable and won’t take advantage of you.
Don’t forget about taxes
This varies depending on how you came into this money, but the government could want a cut. Gambling winnings are taxable, including the Lottery and other prize games. Inheritances can be taxable, but that’s a complex subject that depends on the type of inheritance and the value of it.
Regardless, make sure you’re fully aware of what your tax obligations will be so you don’t end up with an unwelcome surprise. If you’re unsure on anything, consult with a lawyer or an accountant who can explain whether you’ll owe taxes and if so, how much.
Do choose the right accounts to protect your money
While it’s good to invest a chunk of your money, you’ll also want to have some in the bank. That way you’ll have easier access to that money and its value will be more stable.
It’s worthwhile to do some research on the best bank accounts to store your cash, as you could earn much more interest that way. In particular, you should look at:
- Savings accounts -- These have higher interest rates than checking accounts, allow convenient access to your money, and are insured for up to $250,000 by the Federal Deposit Insurance Corporation (FDIC).
- Certificates of deposit (CDs) -- CDs typically earn even more interest than savings accounts, but you must leave the money in the CD for a set term, such as one, two, or five years. If you’re worried about overspending, a CD can be a smart way to force yourself not to touch a portion of your money.
Making your money last
A sudden increase in your bank account balance is a huge test for your impulse control. Even if you’re someone who normally makes sound financial decisions, it’s still tempting to buy everything that catches your eye and be extra generous with the people you know.
There’s nothing wrong with enjoying your wealth on occasion -- just don’t overdo it. Be smart about how you allocate your money so that you can keep it for the long haul.
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