4 Important Steps to Protect Your Sudden Wealth

Whenever I meet with people that come into sudden wealth, I see a lot of similarities: they're overwhelmed, panicked and unsure of what to do with the newfound money. I am not referring to an expected inheritance—I'm referring to instances like winning the lottery, getting a settlement from a lawsuit, or having any large sum of money that unexpectedly hits your life. 

Sudden wealth can change your life, hopefully for the better, but it could potentially end up in disaster if you do not follow a few simple but very important steps. Once you receive the money, the first and most important thing you should do is: nothing! Let reality settle in and get used to the idea that you have this new wealth. (For related reading, see: Tips for Handling Sudden Wealth.

What to Do With Your Windfall

  1. Put the money into a bank, or a CD from anywhere between three to 12 months and leave it there. Do not worry about not getting any interest—the most important factor is that it is safe. During that time you will come up with many ideas and will go through a range of emotions, such as joy and excitement but also possibly guilt and grief, which is the worst time to make any serious decisions about your money. Pay off any outstanding credit card debt and possible car loans, but consult with a CFP or CPA before paying off all or part of your mortgage. Other than that, simply enjoy your new financial independence, whether you keep working or not.
  2. Keep it to yourself and your spouse if you are married! The fewer people that know about it the better. Do not broadcast it to the entire world that you have all this money. Protect yourself from people that could ask you for money or loans, and especially do not invest in various investment ideas and schemes. This is a quick way to lose money and could possibly ruin friendships and families. (For related reading, see: Sudden Wealth: How to Handle a Cash Influx.)
  3. Do not worry about immediately coming up with the perfect long term financial plan. Start thinking of how you would like to possibly diversify your money, what you would like to buy, and how you would like to make it last for your retirement and possibly future generations. Begin to write down some goals, needs, and concerns, which will help you once you meet with a planner to develop your financial plan. 
  4. Hire professionals. Start by working with a professional planner, who develops comprehensive financial plans. A financial plan will include diversified investment portfolios, your real assets like your home, estate planning documents like wills, trusts, power of attorney, health care proxies, and the appropriate insurances for you and your family such as life insurance, disability insurance, long-term care insurance, liability insurance, etc. If you do not work with a CFP professional, visit fpa.org or cfp.net for all local listings of professionals in your area. 

It is the CFP’s job to help you from the beginning to the end and make sure that all your goals, needs, and concerns are met. Usually professionals already work with estate attorneys, insurance brokers and CPAs who will make sure that the most appropriate plan is being developed for you. If you already work with certain professionals that you trust it would be encouraged to have them be part of your new team as you adjust to your new wealth. (For related reading, see: Start Planning for College Costs Now With a 529.)