A huge windfall such as an inheritance or winning the lotto or power ball is a lot more difficult to handle than you might think.
Statistics point to over 70% of people who have won large lotteries having spent everything within seven years and some even filing for bankruptcy. How devastating it must be to be the most envied and the most stupid person in the eyes of your friends and family all in one life time. Just because you didn’t manage your luck the way you should have and could have.
It must be an overwhelming shock to win a large amount of money. The Power Ball lottery in South Africa which has a chance in a zillion of being won has created wins of R91 and R69 million.
Yes, if you win it and your life changes. So what should you do?
Treat yourself like you would for shock.
Breath deeply and slowly and take your time. When the win has been confirmed and is in the bank perhaps you should go away to a remote and small place somewhere local and with you spouse have a long hard think about what has happened.
Take your time to think about what it means to you. Financial Independence – doing things because you want to and not because you have to. Maslow in his hierarchy of needs called it ‘self actualisation’. A place most people only dream of and now you have been catapulted into this rare and most marvellous space. The trick is to be able to stay there.
You need to think like wealthy people think.
The wealthy invest first and then spend their gains. They are always conscious of growing their wealth. So they don’t spend time on how to spend and splurge. They value their wealth realising it is their source which maintains their elevated lifestyle.
So, your first consideration is you and your families lifestyle and how best you can invest your winnings to maintain yourselves for the rest of your lives. Wealthy people have financial planners to help them make informed decisions. They don’t take advice from buddies over the bar counter or at the weekend braai.
Your financial panner will address key financial aspects such as:
A contingency fund which will provide for 6 months of your monthly income needs. This fund will be available for any emergencies and should be accessible on short notice.
Paying off all your debts which in turn reduces the monthly amount you need to maintain your lifestyle. You will effectively be earning interest from here onwards rather than paying it to a bank.
Investing in inflation beating assets over the short, medium and long term which will provide your monthly income for as long as possible and lump sum amounts for the future, such as education for the kids, holidays, cars etc.
Managing expectations. A good financial panner will help you to realistically evaluate the money you have and how it reasonable translates into your financial freedom. It might not be worth as much as you think when you take into account the number of years needed to provide an inflation beating income.If you won the lotto at age 30 you will probably need to provide for the next 60 years. If you needed an income of say R20 000 for 60 years protected against inflation then you will need about R15 000 000 depending on certain assumptions.
Your financial planner will also address the issues of tax and risk in your investments and structures such a trust should your plan necessitate it.
Don’t give your family and friends a hand out. Rather a hand up.
Once you are absolutely sure of that your provisions have been invested wisely for the future you can then take some of what’s left over and help your friends and family. Rather than handing them a lump sum consider settling their debts on condition that they re-invest the new found disposable income into investments for themselves which in turn improve their wealth into the future.
Financial freedom needs responsibility
Your luck needs to be managed responsibly because it will probably never happen again. It is a once in a life time opportunity to improve your lifestyle and maintain it for many years into the future. Financial freedom is only enjoyed by few, so if you don’t hold onto the win with white knuckles it will slip through your fingers quicker than you think leaving you like most previous winners wishing that they had handled things differently.
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Read more from Paul Roelofse at www.investforlife.co.za
This article first appeared on 702 : What to do with a financial windfall