Understanding New Money

Lottery winners have problems

We have all seen or heard instances where large lottery wins have changed people adversely. Many lose it all. 

It seems that sudden big money causes problems. Most of those are the result of never having had experience with large usable sums. It is a different world when your impulse purchase can be an S-class Mercedes instead of a chocolate bar.

For the empathetic, there will be no shortage of newly discovered relatives and assorted pitchmen.  Life will be nothing like it was before.

Money does not solve problems, it merely substitutes the new problems of too much money for the old ones of too little.

The trick is to discover the meaning of money you don’t need to spend today.

What should a lottery winner do?

After cashing the ticket, the next few steps should be straightforward.

  1. Deposit the money in short treasury bills and things like them. A low yield for six months will not harm your overall result and you need time to create a structure and ways to implement it.
  2. Go away and think about it.
  3. Take time to devise your strategy. What lifestyle do you want? What assets are needed to support it? Who should benefit? When? Where do you want to live? Why have you excluded some of the other possibilities.  This could take a long time to refine but you will likely have the gist of it in a few months. It is like planning a home. How big is the kitchen? Should there be a pool or tennis court?. How big is the garage? Does every bedroom need an en suite? And about 200 more.
  4. Hire professional advisors. A lawyer, accountant, tax specialist, and an investment manager come first to mind. None of these will be found in your bank branch and you should expect to look for them. Remember to keep control. You own the strategy, they supply methods. You should have been searching for these while you were devising strategy.
  5. Communicate the strategy to the advisors and the interested parties. They are tacticians. They work best when they know what you want for a result.
  6. Learn a little about the law, especially taxation. Learn a little about investing. Not so much the way to do it, but what are reasonable results and what kinds fail easily and often.
  7. Revisit the whole thing in about a year. If your first tranche was to pay some capital to the children, what did they do with it? If the money designated to pay off their mortgage turned into a Bentley SUV, you might want to think about the next leg of that plan. What do you do if some are smart and some are not?

The key element in all this is threefold:

  1. Notice that you decide what, when, where, who, and why. You don’t need to know much about how if you have chosen your advisors wisely.
  2. Advisors do “How.” They change your strategy only to the extent it is incomplete or contains contradictions. You must approve the changes.
  3. Don’t do anything you cannot understand or cannot tie to your strategy.

You are not going to win a lottery.

But you might inherit enough money to cause some problems. The process is the same but this time you get to do some of the steps before you see the money. Think strategy, advisors, and lifestyle needs.

Lottery winners are not the only losers

What would happen if you give a 7-year-old $500 with no limits on what they could do with it?  Strangely many adults behave the same way. 

Financial literacy is about attitudes as well as details. Schools don’t teach that. 

Young professional athletes, music performers, and actors seem to have the same problems. Helpers to spend the money. New sources of previously unaffordable excitement. Cars, boats, drugs, booze and jewelry all appear often enough to know they are a problem.

The problem is an old one.

Author, Harriet Ward Beecher, of “Uncle Tom’s Cabin” fame had a brother, clergyman Henry Ward Beecher. He died in 1887 and offers this enduring thought.

A man can no more make money suddenly and largely, and be unharmed by it, than one could suddenly grow from a child’s stature to a man’s without harm.

The boy scouts have it figured out. Their motto is “Be Prepared.” Many of us forget to acquire the skills and thinking patterns that help us.

It is never too late to start.

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. don@moneyfyi.com  866-285-7772

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