Don’t Let A Windfall Blow Away In the Breeze: What To Do If You Come Into Some Money
In 2010, NBA player Lorenzen Wright was shot to death and his decomposed body was found in the woods southeast of Memphis. His ex, Sherra Robinson Wright, who had just divorced the NBA player and was a suspect at one point, received a $1 million life insurance settlement 14 months after his death. According to the Memphis Commercial Appeal, she has spent $973,000 of that in 10 months, reports Black America Web. Here’s how she burned through a cool mil: $32,000 for a Cadillac Escalade; $26,000 for a Lexus; $69,000 on furniture; $11,750 for a New York trip; $339,000 for purchase and improvement to a new home: $7,100 for a pool deposit: $5,000 for lawn equipment; and $34,000 on legal fees. You can’t do anything about legal fees, but that $7,100 doesn’t even cover the whole cost of the pool!
She’s not the first person to waste a large lump sum of money fast. Don McNay, blogging on The Huffington Post, quotes a National Endowment for Financial Education report that found that 70 percent of those who receive a lump sum, from any source, run through it in a few years.
Need another example? New York Knicks center Eddy Curry, who found himself in debt though he had a $60 million contract. He spent $6,000 per month for a chef, $16,000 a month for an allowance that he set aside for friends and family, and had a $570,000 personal loan he was paying off that carried an incredible 85 percent interest rate, says the Sports Fan Journal.
“Lump sum windfalls come in many forms: a legal settlement, insurance payout, or an inheritance. Instead of spending frivolously, use a lump sum to improve your family’s financial future,” says Toni Husbands of Debt Free Divas, financial coaches helping men and women address common money struggles.
Here are nine tips on how to manage a financial windfall.
Shhh! Keep your finances as secret as possible. If people know you have come into a good deal of money, long-lost family and friends will pop up asking for a “loan.”
Setup a Savings Fund
“A savings fund is your best defense against forces that seek to keep you mired in money mishaps, floundering in financial fiascoes, or let’s face it – deep in debt,” Toni Husbands of Debt Free Divas tells us. “For those with debt, place $1,000 for emergencies in a savings account and focus on eliminating debt. After becoming debt free (excluding your mortgage), establish an emergency fund equal to at least six months of household expenses.”
Let the Money Come to You Bit By Bit
Don’t take a lump sum. Most financial experts say it is best, especially for tax reasons, to have the money made to you in payments. This way you will also curb your spending.
Put the Money to Good Use
Start dumping debt, especially if you do decide to take the money all at once. “Lump sums are great motivation to eliminate debt. Apply windfalls to outstanding balances, excluding the mortgage, in order from smallest to largest. Keep the process simple. Ignore interest rates and focus on the bottom line. Reducing the total number of payments to creditors will provide better control of your income,” advises Husbands.
Have a Plan for Using the Money
When people ask, “How would you spend a jackpot?,” actually give it some thought. Don’t simply spend to spend. “Use your money for a purpose,” writes Don McNay in HuffPo. Make a plan to purchase specific items, such as a college education or a paying off a mortgage.
Seek Professional Help
“Qualified financial advice will enhance your decision making process. Many financial planners offer complimentary consultations. Interview several and select one with the patience to answer all questions who can improve your financially literacy,” explains Toni Husbands from Debt Free Divas. “Never agree to anything you don’t fully understand.” Check out the Certified Financial Planner Board website to begin your search.
Take Your Time
Just because it’s there doesn’t mean it has to burn a hole in your pocket. Give yourself a chance to fully digest what you have, what you want, and what you need. “Don’t make any quick decisions. Take some time and put together a plan,” notes Don McNay in HuffPo.
Be Prepared To Give a Portion to Uncle Sam
If you win some money, so does the government. And with prizes, it’s a big payout. So get ready for the IRS. Set aside money to pay the taxes on your windfall.