According to Merriam-Webster,the definition of “windfall” is “an unexpected, unearned, or sudden gain or advantage.” The gain is usually money. It could be an inheritance, a significant bonus or a lottery win.
The definition deals with “unexpected” and while that may not be important with bonuses and inheritances, the meaning to derive from it is the person is unprepared to deal with the money. Unearned is not clearly appropriate to the bonus situation, but if it appears outside normal planning and budgeting, then it is equivalent to unearned. Sudden matters because again, it implies too little preparation.
We know that historically lottery winners do very poorly. There is a recent story in the National Post about a $5,000,000 winner now off to jail. The plain reason is few people are prepared for a significant increase in their financial assets. Most people have been implicitly trained to spend money not grow it or even maintain it. New habits are hard to acquire. Usually had after the money is gone.
Lottery winners are not the only victims. Athletes and entertainers frequently increase lifestyle quickly beyond what can be sustained. I would be surprised if more than a third of them use their money well. Some do very well. Michael Jordan, Magic Johnson, and Roger Staubach have made huge fortunes. Given their obvious business acumen, they may have become wealthy without the start from athletics.
It is in homage to the law of conservation of problems.
Problems are neither created nor destroyed. They merely change their form.
The too little money problem becomes the security, hangers-on, family and friend loans, charity requests, overspending, private equity investments and first time experienced emotions and sometimes guilt. No one is ever ready.
Advisors are necessary. Not because they can make you more money than you might yourself, but because they can be your conscience. They can holler “stupid” before the money is irretrievably lost. They can help balance lifestyle against future income. They know about taxation, inflation, risky investments and impulse buys of exotic cars and homes. They know capital lost today is income lost forever.
Good financial planning is about balance. The key observation for the newly wealthy is that balance includes many things they have never before cared about or even noticed. The one thing they will learn is the price of experience. It will be a race to see if all the experience can be acquired before all of the money is spent. Experience is the best teacher and for the price it should be.
People learn by experience, their own or others. Advisors can offer lessons from the others. Same lesson, ridiculously lower price.
Don Shaughnessy arranges life insurance for people who understand the value of a life insured estate. He can be reached at The Protectors Group, a large insurance, employee benefits, and investment agency in Peterborough, Ontario. In previous careers, he has been a partner in a large international public accounting firm, CEO of a software start-up, a partner in an energy management system importer, and briefly in the restaurant business.
Please be in touch if I can help you. firstname.lastname@example.org 866-285-7772