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Windfall...What Now?

Receiving a Significant Cashflow

This article will provide information if you have recently received a substantial sum of money; either through an inheritance, lottery, gift, or other means. Understanding the available options will help you make the best decisions for the future. 
Given the sudden change in your financial situation, a number of different thoughts and emotions may race through your head such as the emotional high that comes with a lottery win or the emotional low that comes from the loss of a loved one. You may wonder: What should I do first with this money? Do I have enough to retire immediately? How do I put this money to best use? What would my loved one have wanted me to do with the money? 

Having worked hard to pay your bills and save whatever you can for your retirement and other financial goals, you may be feeling somewhat overwhelmed about what to do with this sudden new wealth. This article outlines some common financial planning issues to reflect on, as well as suggestions on how to use your new wealth to your best financial advantage, for now and the future. By considering some financial planning ideas now, you may be able to make your new wealth go further and provide an even greater benefit. 

Initial Issues to Consider - Before making any decisions about how to use this money, take some time to work through any emotions you are feeling as a result of this event. The time required to adjust to this change in fortune can vary (six months to one year is not uncommon) depending on the amount of money received, your personality and the circumstances surrounding this event. 

For example, if the money came from the death of your spouse or parent, you may need time to work through the grief and adjust to your new circumstances. If you just won the lottery and have little money management experience, you may be feeling paralyzed as you try to decide what to do first. 

The emotions you are feeling as a result of your new-found wealth may influence you to make a decision that you would not otherwise make. It may therefore be a good idea to delay making decisions about what to do with the money until you feel you have adjusted to your new situation.

You may also wish to set aside a small amount (so you do not feel guilty about spending it) as “fun money” to do something you enjoy; however, try to avoid making impulsive decisions. 

With new-found wealth, you should also be careful with your money as you may be subject to requests and solicitations from family, friends and charities. Remember, it is okay to say no or not yet to requests that you receive. That will give you more time to put a plan in place.

Make a Wish List - Take some time to consider all the possible uses for your new wealth. For example, you could use the funds to pay down existing debts, purchase a new vehicle, take a vacation, help your children purchase a home or start a business, or save for your children’s or grandchildren’s education. Deciding how to use these funds will take some consideration.

It is not uncommon for the recipient of a large amount of money to have some charitable intent. If this is one of your goals, ask your advisor how to create a lasting legacy to benefit the charitable organizations of your choice for many years to come, as an alternative to a one-time cash donation.

Prioritize Items on Your Wish List - The next step is to prioritize the various items you have included on your list. If you have outstanding debts with high interest rates, you may wish to give the reduction of these debts priority over other items. Your advisor may be able to help you with this step and can also provide independent advice at a time when you may be dealing with deep emotional issues. 

Develop a Personalized Long-Term Financial Plan - Develop a solid, personalized, long-term financial plan with the help of your advisor. This will give you better insight into whether your long-term objectives (e.g., the ability to sustain a desired lifestyle) can be achieved. Once you know that your long-term goals can be achieved, you can then focus on short-term objectives such as upgrading your existing home or helping out a family member. You should also consider reviewing your Will and power of attorney with a qualified estate planning legal advisor.

Don’t Forget the Tax Issues - The thought of paying income taxes can be the downside of new-found wealth. In addition to paying the government money that you would probably like to use for other purposes, the complex tax rules can be confusing. However, it is important to consider income tax issues whenever you engage in any financial planning. 

Some good news about lottery winnings and inheritances is that they are generally received on a tax-free basis, but there are exceptions. 

You may want to consider investing your new-found wealth to generate regular cash flow. You will have to pay taxes on any income you make, but remember that earning certain types of income, such as Canadian dividends and capital gains, may result in less tax payable than putting the money into interest-bearing investments. 

You have many choices for using your new-found wealth. By stepping back and analyzing your circumstances using basic financial planning techniques, it is possible to ensure that the funds you receive provide the most benefit to you and your loved ones. Some complex financial planning issues may arise, so please consult your financial advisor and your qualified tax advisor with these issues.