“Hello, Kalu, my brothers and I just got a substantial inheritance from the estate of our grandfather. It is six figures and in USD. I have never had that amount of money. I don’t know what I am even to do.”
That was a message I got from someone. How do you deal with a sudden abundance of wealth or cash flow? It is not an easy question; you cannot spend it all, so here are a few tips on managing a one-time windfall.
Be prudent
Start with not telling anyone outside your professional advisers about your sudden wealth. You need time to appreciate what has just happened to you. A significant inflow of cash can change your career, location, and plans. The last thing you want is to have friends suggest to you how you should spend or invest. You also do not want to become a target of fraudsters, so prudence and actions are essential.
Speak to advisers
It would be best if you spoke with professional advisers. Getting their advice is essential to understand how you can transfer the wealth to your name without dissipation due to taxation or fees. One of the essential advisers is a tax lawyer. Your sudden wealth will raise your assets and income and put you in a higher bracket for taxes.
Taxation is based on income; this windfall may not qualify as income but as an asset, thus, it could be taxed differently. Hear from the experts; should you set up a trust? Take a lump-sum distribution? Invest? Are you going to keep working at your job? Start your own business?
Suppose you still have a tax bill after deductions, I advise you to take tax liability from your windfall and place it in a separate account to be used to settle the liability.
Revise your estate planning and protection documents
Your net worth is up, you must have a clear plan on how to protect and transfer your assets in any eventuality. Update next of kin, health guidance documents and have a financial power of attorney drawn up. Have a custodian with legal powers manage your assets if you do not have the means to do so.
Your wealth means the everyday occurrences that you may ignore can become contingent liabilities. Ensure you have full insurance coverage, especially third-party cover. Ensure your passwords and accounts online access are appropriately protected.
Redo your financial plan
A financial plan is not intended only to generate wealth. Now that you have wealth, you may be less likely to seek higher returns in high-risk ventures. As your objectives and risk profile change, ensure they reflect in the type of assets you hold. For instance, are you still comfortable with high volatility growth holdings in Biotech and AI stock? Or have your objectives shifted towards owning dividend-paying champions in consumer goods and utilities? If your goals become more balanced or capital preservation in nature, then restructure your portfolio.
Remember the basics
Just because you are a millionaire should not stop you from getting your financial basics in order. Rethink your emergency fund; it should get more significant. Pay off all high-cost debts, especially credit cards. If you have a tax-advantaged account, like a Retirement Savings Account or 401K, max it out. Make all the good financial habits you would have done if you got a smaller windfall. Watch the pennies.
Pay yourself a fixed amount, keep a budget
When you get any lump sum, the temptation is to spend that lump sum on assets and large-scale investment. It is understandable. If you inherit an asset like a business, you must ask if you can manage it going forward. If you cannot, hire a manager and earn passive income. If you receive cash, you have more options. You can buy another business and be personally responsible, or you could invest the money in a security that pays a passive return. Remember to pay yourself a salary; receiving a fixed sum will enable you to budget and keep you disciplined. Pay yourself an amount you determine will allow you to live the lifestyle you can afford. Do not dip periodically into your assets on a whim.
Consider giving to charity
You now have the means to change the outcomes of other people and support initiatives that you care about. Consider starting an endowment or contributing to a charity; you do good to society and reduce your taxable income. An endowment, for instance, will ensure your giving is perpetual and outlasts you. It is also a plus on the mental side.
Invest in yourself
Invest in your health and happiness; get a complete medical check-up done, hire a great cook, change your wardrobe, eat healthy, exercise, travel and destress. Wealth buys you time, and you do not have to be at work by eight and only leave by 5 pm. Take advantage of that time, reduce your workload, enjoy yourself. Remember, wealth is a gift, a gift of time and opportunity. Use it.
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