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ADVISORY COLUMN: PERSONAL FINANCIAL ADVISER

Oran Hall | Don’t blow that windfall

Published:Sunday | July 10, 2022 | 12:06 AM

When I saw news of a young man winning 10 million dollars in a game of chance recently and noted that he expressed shock at his fortune, although he had been playing to win, I reflected on what people who get a windfall do after the initial shock....

When I saw news of a young man winning 10 million dollars in a game of chance recently and noted that he expressed shock at his fortune, although he had been playing to win, I reflected on what people who get a windfall do after the initial shock.

Windfalls come in various forms: an inheritance, a court settlement, a redundancy payment, a work-related bonus, an inter vivos gift and proceeds from the liquidation of assets.

Windfalls have the potential to bring radical positive long-term change to the lives of the fortunate recipients, but not all reap good benefits for an extended period as the money soon disappears with little to show for it.

Windfalls vary in size and this may determine how they are treated. Further, the reason it came about may also determine how it is used although they may all be one-off payments. A redundancy payment, for example, may be followed by an extended period of unemployment.

When the windfall is due to redundancy, it should be used carefully as it may stand in the place of the regular employment income lost and it may not always be clear for how long unemployment will last.

Ideally, though, such funds should be used for savings, investment and debt reduction as well as to create other forms of income like starting a business.

Investment assets that are liquidated may be used to make other investments, the same type or a different type, depending on what the priorities are, as well as to create greater opportunities for portfolio diversification. The windfall may also be used to realise goals that were previously established, for example, buying a house or paying for the tertiary education of a child.

There are many reasons why people lose their windfall. In some cases, they were unprepared as they did not expect it and thus made no plan and set no goals. In such a case, it is easy to spend without good reason.

A low level of financial literacy is another reason. This may lead to the recipient making unwise decisions or depending on others to give guidance in the making of investment and financial decisions. Those entrusted with that responsibility may not be honest or knowledgeable enough about financial matters or spend enough time to understand the individual’s situation, which is so critical to the decision-making process.

Waiting until good fortune comes to begin to get financially literate is not early enough. It is important to get some level of financial literacy on an ongoing basis to be able to make reasonable financial decisions when the need arises.

Beyond that, it is vital to engage competent and qualified professionals to give guidance or to undertake management of the funds.

Creating a plan with clearly defined goals can go a far way in defining how the money is spent. That plan should align with the plan associated with any existing pool of financial resources.

When word goes out that big money has come into the hands of an individual, for some reason, friends, acquaintances, family – some long lost – suddenly appear with pressing needs, loving stories, and worthy causes to be funded. Additionally, there are those who stretch the definition of friend and family.

The soft-hearted often tend to respond too willingly and give up too much. Where there is a tendency to be generous, this should be done in a programmed way – a set portion should be determined for such demands and for contributions to worthy charitable causes.

This brings me to an important matter – the budget. One should be carefully crafted detailing how much is to be saved and invested and how much should be used specifically for other purposes.

A windfall does not come every day, so it is imprudent to change to a lifestyle based on the thought that this time of higher-than-usual money represents the new norm. A substantial sum of money coming into your hands is not an excuse for conspicuous consumption as this may cause it to evaporate like water in a heated kettle.

It is essential to have a network of long-standing, trusted, knowledgeable connections to give guidance and support when and where necessary. Equally important is the value of being able to play an active role in managing your own money. For this, time and some level of financial literacy are essential.

Oran A. Hall, author of Understanding Investments and principal author of The Handbook of Personal Financial Planning, offers personal financial planning advice and counsel.finviser.jm@gmail.com