According to the National Endowment of Financial Education, 70 percent of people who get a large windfall of cash will spend all of their new-found money within the first three years of receiving it. Indeed, a lot of people dream of getting "sudden money" through an inheritance, lottery windfall or a giant bonus at work, but with this money comes an enormous amount of responsibility and self-control.
If you want to keep the sudden money you receive, you'll need a plan to manage it wisely. By following these four tips, you'll be well on your way of keeping the new funds in your possession so you and your family can benefit from it in the years to come:
1. Get Ready for Tax Liabilities
In most cases, the IRS can claim a significant chunk of the sudden influx of cash you receive. If money comes from the profitable sale of an asset, for example, it will trigger capital gains taxes. It is vital to know what your tax liabilities are ahead of time. Otherwise, you could inadvertently spend too much of your windfall and land yourself in tax debt.
2. Pay Off Debts and Create a Safety Fund
If you're in debt, you'll want to use your sudden money to pay off creditors and rebalance your finances. Next, set aside a reserve fund that will cover your expenses for three to six months in the event you lose your job or face a financial emergency.
3. Keep Temptations in Check
Depending on your situation, you might be tempted to spend too much, give away too much or gamble too much on risky business ventures. It is vital to employ self-control whenever you consider letting any of these funds go. This involves the difficult task of saying "no" to financially needy friends and relatives, and being conservative with your spending habits.
4. Employ the Services of a Financial Planner and Estate Planner
A financial adviser can help you create sound investment strategies to conservatively grow your new money, in addition to creating a spending plan that is appropriate for your upgraded level of wealth. Employing one to help manage your sudden money may be the best decision you ever make.
Many professional athletes and musicians employ financial managers to dole out a certain amount of money each month and advise them on spending and investing. Doing so can help you control personal spending. It can also prevent you from giving too much money away, or wasting your money on risky business enterprises.
An estate planner is also important, but this is more about your family members and the heirs you leave behind. Having a sound estate plan becomes especially important when you have accrued a large sum of money.
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