Building a corpus during your working years requires effort, discipline and planning. But a privileged few get rich through a windfall - sale of a business or property, settlement of a lawsuit, receiving an inheritance, or insurance settlements. Financial planning can help you leverage this to your advantage.
Many beneficiaries are not prepared for the consequences of sudden wealth. They are often clueless about how to deal with a large amount of money. Studies show that more than 35 percent of lottery winners declare bankruptcy in 10 years.
There are two main reasons why people lose windfall wealth. One, many are emotionally ill-prepared. Windfalls can stir feelings of guilt, anger, confusion and fear. They may even be accompanied by a sense of loss in the case of an inheritance from a loved one. And two, it's hard for them to plan how they will live and invest, now that they are rich. Should they take a luxury cruise? Invest the money in safe instruments? Get into highly aggressive and risky investments?
If you receive a windfall, introspect and understand your current situation. Gain control over your emotions, and settle into your new routine. Plan your wealth carefully to make it grow, and review the plan regularly.
Review your situation
For people without much savings and investments, it makes sense to use the windfall to create an investment portfolio, bearing in mind future goals. If you have high-cost debts like personal loans and credit card balances, settle them first.
A windfall can make some wishes come true, which had to be ignored before. For example, you may be able to send your children to a good university, or buy your dream house, or create a charitable trust. Such goals can be met with some advance planning.
Get a sense of control
- First things first - a portion of the wealth should be kept liquid for an emergency, ideally for three to six months' living expenses.
- Then review your goals and allocate resources accordingly.
- Setting quantifiable goals will give you a sense of control, and help you set the direction and pace to achieve them.
You may find you can set aside less of your future earnings for your retirement fund. Your ability to withstand risk may improve, and you could consider allocating more of your assets to equity, to build a larger corpus. You could retire early, perhaps start a business. But such decisions should be taken in consultation with your family and a reliable financial planner.
Choose your advisors well
Perhaps the most important decision is to choose the right professionals to advise you. The best way is to seek references from friends who use the services of an advisor, as such a person is more likely to be trustworthy. Ideally, meet with at least three advisors before deciding on one. Choose someone of good repute, who shares your values. A good financial advisor would be familiar with all asset classes.
Review your plan periodically
Once your decisions are executed, ensure that your investments are working towards achieving your long term goals. Keep track of succession planning and insurance needs, and your tax situation.
Watch out for obstacles
- Overspending: Keep that urge firmly in check. Ensure that your good fortune is not spent only on luxuries. Investments serve you better in the long run.
- Advice from friends and family: You may be deluged with this. It may be difficult to turn down advice from a close friend, but be firm, set emotions aside, and insist on evaluating all your options.
- Advice from financial intermediaries: Relationship managers of banks, distribution companies, or fund houses may contact you. Choose wisely. It's better to select a financial planner who offers advice on various asset classes to meet your needs, rather than limited product-based advice.
Solicitations for charity
People may expect to borrow or receive some of your money - maybe a relative wanting to start a business, or a friend in dire need of money, or a charitable institution with an important and noble cause. It's natural to want to help others, but it's important to do this prudently. It is not bad to turn people down, as long as you treat them with dignity.
