In a recent post, staff writer Lisa Aberle provided an excellent outline of the kind of financial information and preparation you should provide for your loved ones in the event of your incapacitation or death. It's no fun to prepare this information, which may be why so many people avoid it. But as we've discussed, it's necessary to have a plan to help people navigate your finances during what is sure to be a highly emotional time. But what about highly emotional times that aren't actually bad?
It's not very likely that you'll get hit by a bus or fall into a coma tomorrow, but you know that you need measures in place, just in case. Well, it's also not very likely that your office pool will win Powerball or that you'll receive a large, unexpected inheritance, so why would the fact that it's not likely stop you from being prepared to handle a windfall should one come your way? Do you have a plan in place in the event of a windfall?
Many people are not prepared for the various ways that money could come into their life, whether through the wildly improbable lottery or gambling winnings or slightly-more-practical payouts such as an insurance settlement or profits from selling a home or business. The news is rife with unfortunate stories of lottery winners whose winnings didn't last very long. In fact, according to the National Endowment for Financial Education, about 70 percent of people who suddenly receive large amounts of money will lose it within a few years.
There is a lot of information out there on what to do with your windfall once you have it, but not too much on how to prepare for a sudden financial gain. Make an outline of information that you can reference in the event of a windfall; a touchstone to reality in the midst of all the emotion and excitement could be a financial lifesaver. Granted, the amount of money that comes to you will probably dictate how far down this list you can go. So, think about making a couple different versions of this list, perhaps “10-50K,” “50-250K,” and “Greater than 250K.”
Window shop for a lawyer and a financial adviser. This step may or may not be necessary if the amount is on the smaller side. If you don't already have/need one, narrow your choices down to a top three and record their information on a spreadsheet. You may want to go so far as to have a free consultation.
Bank accounts and taxes. Your financial adviser will be able to help you decide where to park your funds and how to plan for your tax obligations.
Debts and obligations. Create a list of all outstanding debts. Remember to update this list every few years as your obligations change.
Splurge. Giving yourself permission to splurge — just a little bit — will feel like a treat without going nuts. What percentage would you splurge? Two to 10 percent seems to be a common suggestion. Set a limit for your future self to have some fun.
Financial goals. Write down your financial goals. Pay off credit cards? Pay off student loans? Pay off mortgage? Fund retirement account? Fund Junior's college account?
Charity. This includes gifts to friends and family. Who would you help if you could? Making these choices before you come into any extra money could help you identify your priorities. Pay for niece's college? Pay off parents' car? Become a donor for a local charity?
Personal goals. Your financial obligations have been met; now, it's time to use money as a tool to help reach some of your personal goals. What personal goals would this money help you achieve? Would you start that business? Go back to school?
We'll all pass away one day, but none of us are guaranteed to hit a jackpot with a seven-figure payout. Do you think planning for an unlikely event is worth your time and effort? What additional information would you have ready in order to be prepared for a financial windfall?