Having an unexpected windfall fall in your lap can feel like a godsend. All of a sudden, you have money to achieve the things you’ve long desired. But not so fast–spending your newfound wealth without a plan can put your money in jeopardy, according to experts.
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“Receiving a significant amount of money unexpectedly, whether it’s from an inheritance, a sudden gain, or any other source, requires a thoughtful and prudent approach,” said Adam Garcia, financial consultant and CEO of The Stock Dork. “It’s important to determine your financial objectives and prioritize them,” he added. “You may have goals such as paying off debts, building an emergency fund, saving for retirement, or making strategic investments. Having clear goals will help guide your financial decisions.”
To ensure long-term financial stability, taking the following steps can help you if you find yourself with a sudden large amount of money.
Eliminate High-Interest Debts
Garcia recommends paying off outstanding high-interest debts like credit card balances or personal loans. “Reducing or eliminating high-interest debt is a smart use of windfall money as it can save you significant amounts of money in interest payments.”
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Create an Emergency Fund
Creating an emergency fund is crucial for financial security, said experts. Garcia suggests aiming for at least three to six months’ worth of living expenses saved in an accessible account. This will provide a financial cushion in case of unexpected events.
Diversifying Your Investments
Investing a portion of your windfall can help it grow over time, said Garcia, explaining that diversification is important in managing risk. Consult with a professional to develop an investment strategy that aligns with your risk tolerance, financial goals, and time horizon.
Avoid Impulse Spending
“It’s important to resist the temptation to make extravagant purchases immediately after receiving money,” Garcia advised. “Maintaining financial discipline and avoiding impulsive spending is crucial as it can quickly deplete your windfall.”
Plan for Taxes
Depending on the source of your windfall, Garcia says you may be liable for taxes. Working with a tax professional to understand and plan for any tax liabilities is crucial. “They can also explore tax-efficient strategies for managing your wealth.”
Don’t Immediately Leave Your Job
If you quit right after getting this money, you might find yourself in financial trouble soon after, said Jonathan Merry, finance expert at Moneyzine. “Everyone needs to be doing something productive. Without a job, you might waste your newfound wealth.”
Keep the Money Safe and Wait
While seemingly counterintuitive, Merry recommends letting the money sit in your bank for some time after you’ve settled your debts.
“Don’t touch it as soon as you get it,” Merry said. “It’s more about you adjusting to the change than the money itself. Your life changes with this money, but your desires remain. Resist them.”
He says it’s wise to not use this money for at least six months as it will help you see the money’s role in your life more clearly.
Focus on Educating Yourself Before Spending
To maintain this wealth, you have to educate yourself, Merry said.
“You have this money, but you need knowledge of managing it,” he said, adding that learning about finances and how money operates can stop you from making poor decisions or being tricked.
Consult a Financial Expert or Stick to Your Current One
“Understand the financial relationships and services your relative had with their advisors if you inherited the money,” Merry advised. “A common mistake I’ve observed is shifting to a new financial expert who might misuse your funds.”
He suggested consulting your current advisor about any financial moves.
“New opportunities can seem promising,” he said, “but they can also be risky.”
Dennis Shirshikov, finance expert and head of growth at Awning, recommends taking it a step further and assembling your own trusted team of experts.
“Surround yourself with professionals — financial advisors, attorneys, accountants,” he said. “These experts will guide you on tax implications, potential investments and estate planning.
“I once encountered an individual who, upon receiving a large inheritance, made several impulsive purchases. It wasn’t until he sat down with a financial planner that he recognized the missed opportunities for wealth preservation and growth.”
Follow the 5% Rule
“Remember, this money won’t last forever unless you follow the 5% rule,” Merry said. “It’s based on average returns from investments.”
Investing wisely, like in the S&P index fund, can give just over a 5% return yearly after inflation. For example, with $5 million, he said, the 5% rule means an income of $250,000 every year. “Diversify wisely, and you’ll be stable.”
Play It Safe
“Why gamble with your fortune?” Merry asked. “You’re in a lucky spot that can benefit you and your loved ones if you’re careful.”
He says to avoid uncertain investments or trying to double your money fast.
“Be grateful and careful, and your money will take care of you.”
Think Long Term and Stay Grounded
Wealth can be fleeting if not managed wisely, noted Shirshikov, who says it’s important to focus on long-term growth rather than short-term gains.
“And always stay grounded,” he said. “It’s essential to remember where you came from and the values that got you there.”
Shirshikov offered the anecdote of a renowned musician who, despite his vast wealth, still frequented his favorite local diner, cherishing the memories associated with it.
He said it’s also worth noting that sudden wealth can often bring unforeseen challenges.
“Friends and family might view you differently or approach you with investment opportunities,” he said. “It’s essential to approach such situations with discernment and always return to your core values and goals.”
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This article originally appeared on GOBankingRates.com: 12 Things You Must Do When You Become Suddenly Wealthy
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