A news article came out today about how a widow received $1 million in donations and insurance payouts after her husband died became broke in a year. Most people would be shocked at how somebody can spend $1 million in the course of 1 year when many don’t even have income exceeding $100k per year.
However, it is actually a very common thing that happens to people who come by large sums of money, whether be it through inheritance, striking lottery, sportsmen who suddenly get rich etc. If one is not prepared for a financial windfall, the money disappears quickly, with some even reaching a financial position that is worse than before they received the windfall. Some even go to the extent of being bankrupt.
People who suddenly receive a financial windfall usually makes bad decisions in 3 main areas.
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When people suddenly receive a large sum of money, they generally feel rich and feel that they are able to spend more than average. The spending builds up over time and gets more and more extravagant, to the point where they are unable to cut back due to the desire to maintain that lifestyle. While the article didn’t specify much on this, to spend $400,000 within 5 months is obviously a clear sign of overspending.
2. Gifts to Relatives/Friends
When you strike it rich, relatives and friends will not be shy to ask for money from you. You may feel the need to give them as they are not as well off as you are. It is exactly what happened to her, she gave money to her relatives and friends.
3. Bad Investments
Finally, the most damaging aspect usually comes from bad investments, be it in businesses which are doomed to fail or investments which are too good to be true. After watching the wealth dip rapidly due to overspending, they generally feel the need to invest the rest of the money that is left. Unfortunately, this is usually where they get dealt the worst blow. She spent almost half or the money, or $500,000 in her brother’s business which failed.
So How Should You Handle a Financial Windfall?
In general, the first thing to do is to take a step back before doing anything. Do everything as per normal before receiving the windfall. Don’t feel the need to spend the money. After that, one should pay off the debts and then probably enlist the help of a financial expert in planning financial goals and investments. With regards to relatives or friends who come with their hands out, learn to reject them without feeling guilty. Giving them money does not really help them either, it just makes them more dependent. For more tips on how to handle a financial windfall, see Entrepreneurs – How to handle a financial windfall!
About the Author
Calvin Yeo, CFA, CFP is the Managing Director of Doctor Wealth Pte Ltd (www.drwealth.com), which is is revolutionizing the financial advisory industry by building an online platform to provide high quality and comprehensive financial advice for free.
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