There has been no shortage of news surrounding the recent record Powerball jackpot. Our Charlie Smith was included in a Pittsburgh Tribune-Review article offering advice to the potential winner and Mike Blehar was on WPXI-TV doing the same.
Countless hopeful Americans went to sleep the night before the drawing dreaming about what they would do with their newfound wealth. But, what most people likely did not consider is the huge financial responsibility that comes with a sudden windfall.
There are a few important steps I would recommend that the Powerball winner, and any person coming into money suddenly through an inheritance or the sale of a business, do to ensure the newfound wealth isn’t misspent before it’s maximized.
First, treat yourself. Take a portion of the money, no more than 10 percent or $10,000 (whichever number is smallest), and splurge immediately. Get this urge to blow the money on items you’ve always dreamed of buying or doing out of your system. It’s the emotional response and after all you deserve to treat yourself a little. Make sure you set a limit and stick to it. Then, do nothing. I mean do nothing else with that money, set it aside and get to work on preparing for your new future:
- Put a team in place. Interview and then hire good advisors in this order – tax advisor, legal advisor, investment advisor/financial advisor and perhaps insurance advisor. You are not implementing any plans yet, you want to put your team in place to prepare. The most successful business people realize they are not experts at everything and they surround themselves with good advisors who can help them achieve success.
- Huddle up. Once you have done the due diligence and hired you’re A-team, meet as a group to discuss your goals, dreams and objectives. Start to consider how to implement a plan to reach those goals and objectives.
- Identify your spending personality. We typically encourage people to take the lump sum, because financially that’s smartest. But, some self-reflection with your team will help you realize your spending habits, and whether the annuity is a more responsible option for your spending personality.
- Think about the kids. One of the biggest risks of wealth is giving your children too much too soon. What is going to be best for your children in the long-run? You don’t want to stunt their emotional and financial maturity as well as their ambition and ability to become a successful independent adult. Attaching strings to the money or limiting their lifestyle changes are smart moves to ensure your children aren’t adversely impacted.
- Have honest conversations. When dealing with other family members asking for money set parameters and reasonable expectations. Communicate clearly and don’t let expectations get inflated. If the stakes are high enough, ask your attorney or financial advisor to run interference. They are objective and can make the unemotional decisions. The IRS allows a tax free gift of up to $14,000 per person per year, which can help put a cap on the amount you’re expected to give.
Ultimately, proper planning can help thwart the horror stories we hear of people squandering an expected or unexpected windfall. Take the time to make smart and sound financial decisions with your wealth, no one has ever regretted doing that.