Whether a windfall is large or small, it pays to plan to make the most of it all.
Several years ago, when I wrote Suddenly. .. It's You! for the B.C. Lottery Corporation to give to major winners, my research showed winning a lottery usually didn't alter a person's money habits. Spenders happily spent the money but savers continued to save.
Typical windfalls include one-off lump sums like a lottery win, inheritance, gift, home or investment sale, retroactive pay, retirement or other employment benefit, tax refund and so on.
Consider the following approach to get the most personal and financial benefit from such funds.
The windfall amount, your personality and your financial situation will affect the percentage guidelines given here.
Spend and enjoy some of the money, a higher percentage for small amounts and vice versa
For example, for a $1,000 windfall perhaps 10-15 per cent but for $100,000 closer to five per cent.
Pay off non-deductible debt
Even with today's relatively low interest rates, you can rarely earn a guaranteed, no-worries, after-tax return that is higher than your loan rate (which equals your "investment yield" when you pay off a debt). And if you have more expensive debt like outstanding credit card balances, then you definitely want to use your windfall to mop up this red ink.
Share the wealth with family, friends, your favourite charity
But first, pay off your debt. Then redirect some or all of your former repayments into a "share the wealth" account, which could run five to 15 per cent of your windfall amount.
Actually, you should pay off debt first with the windfall and only then spend and enjoy an amount based on the former repayments.
But sometimes the "personal" can come before the "financial" in personal financial planning.
Invest the money
This should include guaranteed instruments, equities, real estate, a business, and possibly collectibles, with the percentage breakdown depending on your knowledge, risk tolerance and, above all, personal and financial situation. With larger amounts, you should definitely enlist the help of knowledgeable and objective advisers, a financial planner, accountant, and/or lawyer.
Mike Grenby is a columnist and independent personal financial advisor; he'll answer questions in this column as space allows but cannot reply personally. Email [email protected]
