Finders keepers
A big-picture plan will help to make the most of a surprise windfall
Some people say “more money means more problems.” Between you and me, those are the type of problems I am more than happy to have.
All joking aside, there is certainly some truth to it. For example, if you manage to get a $10 tax refund, I highly recommend spending it on a three- flavour cup of gelato for you and a friend. It is a wonderful spring treat. But what happens when the tax refund is $ 10,000? Then how do you spend it?
At $10,000 you can go the fun route and spend it on a trip to Hawaii, a down payment on a new car or even buy a couple of top- of- theline drones to amaze and annoy people with. But you can also go the responsible route and use it to pay down highinterest debt, fund your 2016 RRSP, TFSA or RESP accounts, or even make do an overdue household repair.
As we can s ee, more money at least leads to more choices, if not exactly more problems.
Now l et’s up the ante. What if the “found” money goes far beyond a tax refund and moves into the territory of a large inheritance or lottery win. Let’s say there is $1 million of new-found money. What do you do next?
This amount of new wealth can start to be life altering, and there is a risk of creating real problems. We have all heard the stories of those big winners who lost it all and say later they wish they had never won the lot- tery. To avoid being in that situation, it definitely makes sense to do a big- picture review before you make any spending decisions.
In this review, you would want to think about: ❚ What is important in your life and what isn’t? ❚ If you didn’t need to work, would you quit your job or keep working? ❚ If you wanted to do a different type of work, would extra wealth give you the confidence to make that change? ❚ Philosophically, do you believe that you should give money to family members if you are financially able? ❚ Is there a charity or charities that you would like to have an impact on? ❚ Are there things that you would do sooner if you were financially able, rather than waiting until you are older? ❚ Do you view this “found” money differently than your other money? For example, is it somewhat “easy come, easy go,” or is each dollar valued the same as your salary?
I believe that these types of questions are key to answer because with all of this money, you need a better decision making model. You need to have some clear reasons to put money in A versus B, or to help out person A but not person B, and these decisions need to relate to what is important to you long term.
Even if you do not yet have a pil e of “f ound” money, this kind of review can be worth doing. A large amount of new cash can easily cloud your judgment, and although it’s never good to bank on the possibility of a windfall, thinking about how you might handle it in advance may help you keep your priorities straight.
One question that we like to ask clients is “Imagine it is 10 years from today and you are looking back, what would have had to happen for you to feel happy with what you’ve accomplished?”
Many people are quick to advise on how one should invest their money or what they should buy, without understanding t hat bigger picture, but that would be like diagnosing a health problem without asking the patient any questions. Once you’re able to see the big picture and your adviser understands what you want, then you should be in a much better position to face the specific questions about building a plan for what to do with all of that money. The plan is still very i mportant, because even with $1 million, you can’t do everything that you or others might want to do. You also want to be able see the impact of making certain decisions.
With the big picture and a plan in place, it is much easier to deal with family requests for money. You understand your philosophical view, and it is either part of the plan or not. Similarly, the big real estate questions tend to get determined by this process. Does your fut ure i nclude a vacation home? If it does, what type of place would you be interested in? How much time do you see yourself spending there? Where might it be?
Another big question would relate to the likely size of your estate, and how much you would want to leave to your family. This would impact some of your personal spending or charitable plans.
I guess, when you really think about it, more money can lead to more problems — especially when it is “found” money. How you approach it will be the key to proving the old saying wrong.
A LARGE AMOUNT OF NEW CASH CAN EASILY CLOUD YOUR JUDGMENT, AND ALTHOUGH IT’S NEVER GOOD TO BANK ON THE POSSIBILITY OF A WINDFALL, THINKING ABOUT HOW YOU MIGHT HANDLE IT IN ADVANCE MAY HELP YOU KEEP YOUR PRIORITIES STRAIGHT. — TED RECHTSHAFFEN