Have you ever heard of a lottery winner or professional athlete who went broke after receiving an exorbitant sum of money? According to various news outlets, up to 70% of lottery winners spend it all and former professional athletes are four times more likely than you or I to go bankrupt!
If you’re facing the prospects of a large, lump sum of cash, from selling property, an inheritance, the sale of a business or commuting a pension, how can you avoid the same fate?
Invest Wisely
Where and how you invest your money matters. Whether it’s saving $100 from a paycheque or allocating $100,000 from downsizing your home, the basic principles are the same. Start by assessing your goal for the funds (a.k.a. how will you spend it), the potential for income tax erosion, and your tolerance for risk in your investments.
- Goals Matter. If you need some, or all, of the funds for immediate purchases or debt repayment, your investing decisions will be very different than someone who plans to use the funds for lifetime income. Think hard about your goals for these funds as that will be the driver for all other decisions!
- Income Tax Hurts. Are the funds you received already registered or non-registered? Do you have RRSP or TFSA room to shelter investments from taxation? Is your investment selection going to produce highly taxable income? With a top tax bracket over 50% in Manitoba, income tax can quickly erode your newfound wealth.
- Get Comfortable With Investment Risks. There’s a big difference between investing in a diversified stock portfolio and investing in your brother-in-law’s startup business. There’s a big difference in buying real estate and buying GICs. The point is you should understand the risks of your investment choices before your commit your cash to the idea and feel comfortable doing so. If you can’t afford the potential losses, then the potential gains aren’t worth it.
Make a Budget
I know, I know… budgets can be boring! But having a realistic concept of how much you can spend in a particular period of time is vital to making your lump sum last. For example, if you have $100,000 and take $5,000 each year, you can repeat that amount for 25 years if your investments produce a 4% (after tax) annual return. Take out more each year and your resources will diminish faster; take out less and they’ll last longer. You can experiment with your own numbers using any number of online Time Value of Money calculators or by enlisting a Financial Advisor with more complex software.
Stay Accountable
Suddenly having more money at your fingertips than any other point in your life can be daunting. It can be easy to splurge on the kids’ birthdays, a night out on the town with your partner, or on a luxury you’ve long dreamt of. Doing so once or twice probably won’t derail your plans. Doing so repeatedly can become a bad habit for financial stability!
If you have a person in your life to hold you financially accountable, lean on them. Let them in on your goals, your budget and how you’ve invested your money to hit those targets. If you don’t, consider hiring a Financial Advisor to keep you disciplined and on track for your future.
It’s perfectly natural to feel anxiety or stress when a lump sum of cash enters the picture. No one wants to mess it up and become another statistic! Making good decisions, the right decisions, all starts with having a process and framework in mind. Invest wisely, work within a budget and stick to it! You’ll be sure to make it last.
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