Maybe you won the lottery, inherited a substantial amount or had a lawsuit settle. A financial windfall is a blessing, but it can also be fraught with risk if you don't manage it well. According to wealth management advisor Daryl LePage, 70 percent of lottery winners end up squandering their winnings within five years.
Business Insider collected 19 examples of lottery winners who went broke , revealing a pattern of poor financial planning, extravagant spending, gambling and other addictions, bad investment decisions and legal and tax trouble. Pro sports provides many similar examples; the Inquistr lists nine cases of NFL players who went bankrupt after earning at least $35 million. If you're suddenly receiving a significant amount of money, learn how to manage it to ensure you get to keep your new wealth.
Hire Sound Advisors
Sudden wealth advisor Robert Pagliarini wrote on KatieCouric.com that people subconsciously take greater risks with money they come into suddenly than they would with income they earned from work. Pagliarini recommends countering this tendency by hiring competent professionals to give you objective advice.
A good team of advisors should include an attorney, an accountant and a financial planner. Your accountant can advise you on the tax implications of your new-found wealth. If you're receiving regular payments via a structured settlement, an attorney can help you weigh the pros and cons of selling your future payments for a lump sum of cash now. A financial planner can help you invest wisely.
Take Care of Emergencies First
After soliciting expert advice, take care of any financial emergencies. Pay off things like medical bills or overdue mortgage payments. Next, set aside a savings fund to cover future emergencies. Normally, experts recommend you set aside enough to pay for at least six months of expenses in the event of a sudden job loss or medical emergency, but if you've got a late mortgage payment or a lot of credit card debt to pay off, you may wish to reduce this to one month's worth in order to increase the amount available for repaying your obligations.
Pay Down Debt
After creating an emergency savings fund, financial experts recommend getting any debt you have under control before pursuing any other savings and investment goals. Dave Ramsey advocates his debt snowball strategy, in which you pay off non-mortgage debts with smaller balances first to gain momentum for paying off bigger bills.
Grow Your Windfall by Saving and Investing
After taking care of emergency and debt priorities, you can begin multiplying your windfall earnings by pursuing savings and investment opportunities. Financial planner Erik Carter recommends that if your employer offers a matching 401(k) plan, you should max this out first. After this, he says, look toward health savings accounts, traditional or Roth IRAs, and college savings funds to get the most out of your money.