How to handle a windfall

If you suddenly received a large amount of cash, would you waste it or grow it? PHOTO| FILE

What you need to know:

  • We need to understand that a period of transition is needed. A billionaire is used to thinking in billions and transacting in billions.

  • You need to get to the same point. You may not yet be ready for the sum of money you have received, so you need a cooling off phase so that you can get accustomed to thinking at the level of the money you have acquired.

  • So is it possible to cool off while the money is in your bank account? Absolutely not.

Once in a while people may unexpectedly come across significant sums of money. This could be an inheritance, an insurance payout, a larger than usual bonus, a retirement or retrenchment package, the fruits of a business transaction that are finally paying off, sale of an investment, etc. This seems like a problem most of us would like to have, right?

However more often than not, people are not prepared to handle such large sums of money and usually end up frittering it away. We get very excited very quickly.

The unfortunate outcome has sometimes been that we end up losing the money. So how do we manage this windfall so we can get the best possible outcome?

First, understand that no matter how large the amount may seem to you, it can get finished. When we suddenly have funds that our bank account has never seen, we may start thinking that we are invincible.

This is similar to how people act in December when they get their salary quite early. Our tendency is to spend it even though we know we should be thinking about investing it. But it looks like a lot of money and we cannot see the end of it, so we start spending without thinking, buying things we didn’t even know we wanted, simply because we can now afford them.

We start feeling elevated in status because of the new figure in our bank account, and get the things and do the actions that prove our new status. The problem is that these are the very same actions that will ensure that this windfall does not grow or last. Some of these actions include rushing to invest without thinking.

TRANSITION PERIOD

We need to understand that a period of transition is needed. A billionaire is used to thinking in billions and transacting in billions.

You need to get to the same point. You may not yet be ready for the sum of money you have received, so you need a cooling off phase so that you can get accustomed to thinking at the level of the money you have acquired.

So is it possible to cool off while the money is in your bank account? Absolutely not.

Move the money to somewhere safe, for example a treasury bill, a money market fund, or a fixed deposit account.

These are fairly liquid instruments and your money will stay safe. Your money will still be accessible to you but not to the level that you can easily withdraw on a whim as you walk past your favourite shop.

This move will simply give you time to think.

As you are thinking, refrain from shouting the good news to the whole world, who will happily want to give you advice on how to spend it or how they can become the beneficiary of it.

Whatever decision you arrive at, you do not want to feel you were influenced by others. Even if the sum of money is very significant e.g. through inheritance, it is not the time to quit your regular job no matter how much you feel you no longer need it. Remember, this windfall is one-off and does not replace your need for a regular income for day-to-day expenses. You will get into problems if you start using this money for your basic expenses.

It is also best to continue with your normal routine and use this time to do your planning and research. Assemble people who you think can offer you concrete and objective advice.

As much as possible, use people who do not have a vested interest in selling you a particular financial product.

You will need to come out with a concrete plan and objectives for this money, to enable you to decipher the right advice. What do you want money to eventually do for you?

The answer to that question is what will provide the balance between what you decide to splurge on now and how you want to invest.

Many of the people I have worked with have usually come to the decision to use this windfall as a stepping stone to financial security. They were therefore able to see that they either needed to keep growing the money or invest it in a way that those funds generate sustainable income for them. In other words what is the end game for you?

The answer to this can be quite humbling and you may realise that you actually still need a lot more than you have.

 Expose yourself to people who are used to dealing with the kind of money you now have access to. Understand that your regular social circles may not necessarily be the ones with the best advice for you at this stage.