Financial Windfalls: Money Changes, Life Changes

by Jonathan G. Cameron, CFP®

A few months ago I heard Susan Bradley from the Sudden Money® Institute say something quite profound regarding our relationship with money and financial windfalls:

When life changes, money changes.
When money changes, life changes.

The order in which change happens makes a big difference. The latter statement, referring specifically to financial windfalls, turns out to be much harder to handle for most people than the former statement. Let me explain.

Life Changes

Life changes are a constant: marriage, babies, a new home, family milestones, divorce, promotions, demotions, getting fired, moving to a new city, kids going to college, changes in health status (ourselves or in a loved one), growing old, and death.  As with any change, anticipated or otherwise, we regroup; we make budget adjustments; and move forward.  Whatever the life change, you hopefully take wise counsel and update your financial plan accordingly.

Money Changes

By money changes, I’m referring to financial windfalls. Financial windfalls include receiving an inheritance, a divorce or legal settlement, an unexpected profit in a business or investment, gifts received, life insurance proceeds, retirement lump sums, and lottery winnings. Receiving a large sum of money at once, whether or not you knew it was coming to you, requires more careful planning and consideration than simply updating your budget.

Financial Windfalls and Your Relationship with Money

According to CNBC, lottery winners are more likely to declare bankruptcy within three to five years than the average American. Surprising, isn't it?  What do you think would happen if a 19-year-old receives a large lump sum inheritance? Chances are, without good counsel, that money will be gone within a few years. We’ve all heard stories of famous athletes who go bankrupt a few years after retirement from professional sports. 

Why is this? Certainly, there is nothing like unearned income to bring out the worst in people. But more to the point, these are examples where people did not previously have a healthy relationship with money before receiving the windfall. The territory was new. They were inexperienced, and made mistakes. There was no decision-making framework in place:  no final destination and no map to get there. 

What Should You Do?

Seek Trusted Counsel

Seek out advice from a CERTIFIED FINANCIAL PLANNER™ professional. He or she will help you ask the right questions and give you a sound framework from which to make financial decisions. Though we generally turn to family first, your family members may not have any relevant experience.  

Be Aware of Your Emotions

You may experience exuberance, suspicion of others, guilt, an unfounded sense of obligation to certain family members or friends, or an impulse to make decisions too quickly. Be prudent and take your time – as long as you need. Specifically, don’t make cash promises to family too quickly. Families are torn apart all the time over money issues.

Know Your Personal Risk Tolerance

If investing the financial windfall, how much risk are you comfortable taking to achieve a desired return? For example, investing in a laddered bond portfolio is certainly a more conservative investment than holding common stocks. See blog pieces on the subject here and here.  Our Investment FAQs may also be useful.  

Understand Your Liquidity needs

Understanding your need for financial liquidity is also very relevant. How important is it to have ready access to funds if you really needed it? Whereas selling a bond portfolio can be done in moments, unloading real property can take weeks or months.

As Susan Bradley says,

When life changes, money changes.
When money changes, life changes.

Your life is always changing. When money changes, make sure you have a well thought-out financial plan that serves you and your family.

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