ParentCare: You Just Came Into A Large Sum of Cash – Now What?
By Thomas J. McDavitt
It is not uncommon for people to come into a large sum of money. Most of us think of the lottery as the most likely source, but it is far more reasonable to see it come from an inheritance, insurance claim or sale of a home or business. Unfortunately for most people who suddenly have a large sum, they have no plan in place to handle the situation. As a result, they end up frittering away the funds before they know what’s happening. Almost all of us know or have heard of someone who did just that!
The first piece of advice that we give to our clients is that there is no rush to do anything. Patience is a form of action that oftentimes is more rewarding than a strategy filled with hasty decisions. We suggest that clients simply put the money into a safe, secure account held away from their normal bank or investment accounts. It isn’t going to be left there forever, but get used to owning the money and take your time to determine how it fits into your master financial plan. There is certainly no need to put it into the latest and greatest investment program or to go out and buy an expensive car or boat that you might regret later. There will be plenty of investment opportunities a few months ahead and there will always be great sales at the stores ~ so don’t get caught up in the moment.
Take some time to look at the “big picture” and consult with your advisors about the new-found wealth. If you don’t have a financial advisor yet, then you should ask trusted friends or relatives for referrals to someone whom they have worked with for many years. Interview 2-3 different people to find the one that you think is the best fit. That person should be prepared to suggest other necessary advisors for your team such as an accountant, an attorney, or an insurance agent.
You might not need every member of the team immediately, but it is important to know you can call upon them if the situation arises.
Most people think that having too little money is stressful, but studies have shown that a sudden windfall doesn’t reduce stress significantly. You may get requests from friends and acquaintances for gifts or loans to help them through tough times. We strongly urge our clients to stay away from the banking business and simply tell these people that you won’t act without consulting your advisory team. That way it pushes the decision away from you and takes the pressure off. Another common mistake we have witnessed is taking family members on a lavish vacation at your expense. Spending tens of thousands of dollars in a week will not give you the warm feeling that you anticipate. We feel it is more likely to cause regret. Also, be careful what charities you decide to donate to; if that gift becomes public knowledge, you should expect many more solicitations to follow.
Furthermore, while an occasional indulgence is fine, you should consider following the buying rules:
1) Wait one day before you buy anything that costs more than $100
2) Wait 2-3 days if it increases to $1,000
3) Wait a week if it jumps beyond $10,000
Many of our clients have thanked us for these simple guidelines. Impulse buying can be so dangerous to your financial future. Finally, don’t make the mistake of buying a new home that would normally have been out of your reach. The cost of home ownership is much greater than the monthly mortgage! Don’t forget the cost of taxes, utilities, furnishings etc. These extra costs will drain your savings rapidly and forced-sales of real estate later on very rarely result in positive gains for people in over their heads.
In summary, coming into a large sum in a hurry can be a blessing or a curse. If you can team up with your advisors and stay focused upon the big picture, you could turn short-term gain into long term security.
Tom McDavitt, located at 102 Shore Dr. Suite 400 Worcester, MA 01605, is a Registered Representative and Investment Adviser Representative with/and offers Securities and Advisory Services through Commonwealth Financial Network®, Member FINRA/SIPC, a Registered Investment Adviser, and can be reached at (508) 852-6222.