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 with this sudden change in your financial situation.
Given the sudden change in your financial situation, several 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? Can I finally buy something I always wanted? What would my loved one have wanted me to do with the money?
We outline the most 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
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.
The emotions you are feeling because of your new-found wealth may influence you to decide 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. In the meantime, consider putting the money in an investment such as a Treasury bill or redeemable guaranteed investment certificate (GIC) that will guarantee the capital but keep the investment liquid. This will give you time to seek the advice best suited to your unique 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
While you adjust to your new financial situation, 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. It is also not uncommon for the recipient of a large amount of money to have some charitable intent. Deciding how to use these funds will take some consideration.
As your first step, put together a current picture of your financial situation. This does not need to be difficult. By making a list of your current financial needs (such as your outstanding debts), you will be well on your way to making smart financial decisions to ensure the best use of your new wealth. You can complete this list on a single sheet of paper.
Develop a Personalized Long-Term Financial Plan
A financial plan 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 a family member. You should also consider reviewing your Will and power of attorney with a qualified estate planning legal advisor in the light of your new-found wealth to see if any changes are appropriate.
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. You want to maximize the amount of cash you have left after your taxes are paid to use toward the needs and desires you identified on your wish list. Some good news about lottery winnings and inheritances is that they are generally received on a tax-free basis.
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. The amount of tax that you pay on each dollar of income is an important consideration because it affects the after-tax amount that you have available to meet your needs.
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.
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