We all dream about it: What if a big sack of money fell from the sky and into our laps? For some people—beneficiaries of an inheritance, sellers of an invention or business, lottery winners and those who earn fame and fortune in entertainment or sports—this happens, figuratively speaking.
But sometimes the dream is fleeting and may even turn into a nightmare.
"Very often, it gets blown," said Kimberly Bridges, director of financial planning at BOK Financial®. "Because it's viewed as a windfall, it's not valued in the same way as we value hard-earned money."
The statistics say it all: Various news outlets report that 70% of lottery winners eventually go broke. Meanwhile, 78% of NFL players and 60% of NBA players face serious financial hardships after retirement.
Bridges cautions those who suddenly receive a large sum of money not to be "your own worst enemy," and to create a plan that will provide long-term satisfaction. Ideally, you would have that plan before a windfall comes, so you're ready, she said.
"Go through the exercise of writing down your plan with your own hands so that you fully engage your brain," Bridges suggested. "Create value for the money by noting how many months or years you would have had to work to earn this amount. That will help you make the connection to what this money represents—it's not just free money."
Focus on your values—and don't make decisions based on impulse
Another way to make that connection is by thinking of the money in relation to your values, Bridges said. "Think about what's important to you in life and put your new wealth to work in ways that support your values."
For example, family may be really important to you, and you value times when your extended family members can get together. However, some members of your family may live a long distance away and can't afford to fly in for family gatherings every year. In this situation, you can set aside a portion of your windfall to support family gatherings—to cover airfare, hotels, etc.
If you're charitably inclined, you may also want to designate a portion of your windfall to your favorite organizations. Bridges said it's important to have charities in mind before a windfall happens because you will want to do it the year you receive the money for tax purposes.
"Depending on the source of the funds, you may have a significant income tax obligation in the year you realize the income. You can work with your wealth advisory team to accomplish your charitable goals with a portion of the money. That way, you get the tax advantage that same year."
The key is making deliberate, well-thought-out decisions rather than doing what just feels right for the moment. For instance, your first instinct after getting such a windfall may be to pay off debt or move into a large house, but Bridges suggests considering the bigger picture. "If you have high-interest or variable-rate debt, absolutely pay that off. But if you have a 3% fixed-rate loan, you'll probably want to keep that and put the money to work for you in investments instead. You might get a better return in the long run."
As for buying a house, Bridges said you have to consider the actual cost of homeownership beyond the mortgage. Things like property taxes and insurance, plus maintenance, cleaning and landscaping costs could eat up a lot of your windfall over time. Instead, Bridges suggests dedicating the unexpected money toward creating an income stream for life.
Have a team in place to protect your windfall
When making these big decisions, you don't have to—and moreover, shouldn't—make them alone. The biggest part of your windfall plan should be to have a financial advisor in place (or at least in mind), while the other professionals you need depends on how much you receive.
"If you're talking about $50,000, or even $500,000, that's not something you need a wealth management team for. You can work with a financial advisor," Bridges said. "But if you're talking $2 million, you'll need a wealth management team. They will help you determine the best way to make that money work for you."
That trusted team may need to include an attorney, a CPA and an insurance professional, in addition to a financial advisor. Having these professionals in your corner is especially important if you worry that family members may come to you for money, Bridges noted.
"If you're going to have a hard time telling them no, a team of professionals can help you design a wealth plan that will give you an income stream and protect your assets so you don't spend down the principal – either on yourself or on others."
And in the excitement of all that money coming into your bank account, don't forget the importance of updating your will or trust so that your windfall will still support your values even after you're gone. "Designate how you want that money to be used. Otherwise, your beneficiaries may go out and blow it because they also view it as a windfall, not money they earned," stressed Bridges.
You also want to put asset protection in place. "If you get a large amount in a public way, like winning the lottery or through someone's will that is on public record, you now have a target on your back," said Bridges. "You will get people coming out of the woodwork making claims, trying to scam you."
And finally, treat yourself
While all this planning could help support you financially for life, don't forget to pull out some money for fun.
"Nobody wants to feel they're denying themselves. It's important to give yourself permission," said Bridges. "A professional can help guide you on an appropriate amount. But be sure to have that person in place from the beginning to keep impulses under control."
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