Don’t fumble a financial windfall: Plan a strategy

Your ship has come in. Through luck, talent, an inheritance, hard work or fate, you've finally come in to money, and perhaps surprisingly, what you're most feeling is … overwhelmed.

Now what?

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With the conclusion of the recent National Football League draft, a whole bunch of young men are suddenly going to be charged with managing almost incomprehensible sums of money. But what you might think would be the happiest moment of their lives is all too often the start of something much darker.

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That's because receiving large sums of money is not about wealth, it's about dealing with shock and temptation. It's about understanding that while newfound money doesn't really change the world around us, it can quickly change us into something we are not equipped to handle.

Unforeseen consequences

As a financial advisor for more than 20 years, I've seen that newly found wealth can make us irrational. Overnight, we may go from weighing the absolute value of the smallest of purchases to feeling like we have more money than we could spend in a lifetime.

But the statistics don't lie. According to a 2012 Vanderbilt University study, 70 percent of lottery winners end up bankrupt. Additionally, the more money they receive, the more likely it is they'll go broke.

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The statistics as they relate to the NFL are even worse. Granted, most NFL careers are barely two years long. Yet it's still shocking that, according to Sports Illustrated, an amazing 78 percent of NFL players will eventually file for bankruptcy or endure severe financial hardship.

These statistics speak to simple human nature: The bigger the bowl of candy, the more you're likely to eat.

When your ship comes in

According to National Public Radio, 65 percent of Americans will receive a one-time payment—be it from a pension, inheritance or lawsuit—that places them in the top 20 percent of earners for at least two straight years. Forty percent of Americans will actually break into the top 10 percent of incomes at least once in their lifetimes.

People generally fall into two categories when they come into money: spenders and hoarders. Unfortunately, my experience has been that spenders outnumber hoarders 30 to 1. If you make $50,000 a year and you suddenly receive $300,000, that money can seem infinite.

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Far too often, I see people blowing the majority of an inheritance within a year or two. It's amazing how many people will buy a luxury car within the first few months of receiving the money.

But the first thing I recommend you do when you receive a windfall is to take a "money break" and not increase your standard of living for at least a year. That's right. No trips, no new cars, no loans to friends. You need time to adjust to your situation. Unless you have a true medical emergency, the first thing you should do is freeze any new spending.

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Next comes getting control of your emotions. One of the most damaging aspects of newfound wealth is actually related to shock. It may all seem like a dream come true, but joining the ritzy country club across town can actually cause a culture shock that is so powerful, and instill a rush that is so addictive, that you end up spending every cent you have just to keep that sensation coming.

The money starts to go out, and you just can't make it stop. That's why the second thing you need to do when you receive a windfall is to confront your feelings. It's normal to want to join the Swells, but don't. Accept those emotions as temporary, deny your impulses to spend, and then work through your sense of longing while continuing to fight temptation.

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Lastly, you need to stash your money in a safe but inaccessible account to give you time to sort things out. A bank account is fine, provided that you don't have access to the funds through your ATM or checking account. This is brand-new wealth, and you want it to start working for you. My experience has been that, while people who work with an advisor may temporarily resist the value of prohibition, they still should heed the 70 percent lottery-winner-to-bankruptcy statistic from above so they can appreciate that money later.

Outlining a plan

Having a well-thought-out plan and strategy is key. If you have a solid plan and stick to it, your new wealth can provide tremendous value to you and your loved ones. But if you spend and invest without a plan, your wealth can wreak havoc and devastation.

Don't be in any rush. It's best to park your money in a safe place to give you some time to figure out what you are going to do. The money doesn't have to be invested within a month or two, so if it takes you a year to figure out a long-term spending and investment plan, so what? The more time you put into planning out your finances, the better off you'll be.

"The terrible truth of the matter is, most people find that sudden wealth actually ruins their lives."

So when they pick your numbers down at the lottery—or your name in the NFL draft—just remember: The odds are staggering that the countdown clock has started and you are already headed for bankruptcy. The terrible truth of the matter is, most people find that sudden wealth actually ruins their lives.

But you can buck the odds. Remember to freeze your spending, confront your emotions by accepting that your urge to spend is not in your best interest, and then speak to a credentialed investment advisor who will help you develop a good strategy so that the money is there when you really need it.

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Do these things and you may actually find that true windfalls aren't comprised of money, but of the wisdom derived from making rational decisions where so many before you have failed.