COMING INTO CASH?

Q: A friend of mine died recently and she left her two children about $50,000 each. They have asked me for advice on what to do. What do I tell them? Naturally,  I want them to be careful with such a large sum of money..

A: Many baby boomers who gain such a financial windfall — from inheritance, insurance, even the sale of a business — can find it’s more of a curse than a blessing when it comes time to manage their money. “Sometimes these windfalls aren’t as pretty and clean as you’d like them to be, and it’s all hitting you at times when you can be pretty vulnerable emotionally,” said Nick Childers, a financial consultant with the Merrill Lynch Private Client Group. “There’s a lot of pressure that comes with it.” The first rule of windfalls, experts say, is to not buy anything, at least for a while.

People who come into money, whether it’s $5,000 or $5 million, will find themselves targetted by insurance salesmen, would-be financial advisers, family and friends. Holding on to the money becomes a chore in and of itself. The next step, then, is to find someone you can trust to discuss how best to manage your money. Often, the lawyers who handle such windfalls, from inheritance or the sale of a business, can recommend an adviser. Those who have experienced similar windfalls in the past can also recommend someone to help with managing the money. A good, honest adviser will not try to sell someone anything, especially in a first-time meeting. Instead, expect a discussion of how the money should be used within an overall financial plan, how to deal with the tax ramifications of the windfall and any future goals outside of the windfall.

Whether someone has a windfall or not, financial planners also suggest having a six-month cash reserve on hand in case of job loss or hospitalisation. While most people don’t have such a reserve, a sudden influx of cash can be used to create that cushion. Paying off debt is important, especially credit card debt. The interest rates on credit cards are usually much higher than any returns that one could get with a windfall, so advisers say it’s best to pay them off as quickly as possible. Finally, after all that, it’s time to decide what to use the money for. For someone who doesn’t have enough saved for retirement, that’s a strong option. Disbursing it among family members is another possibility, though that can create family strife if not handled well.

Advice on what to do when you come into a large sum of money:
• Do nothing. Take a deep breath and relax. Deposit the money in a money market mutual fund, short-term Treasury bills, interest-bearing bank account or other safe, liquid account.
• Keep perspective. A lump sum of money may not really be as large as it looks.
• Consider taxes. Before you start investing or spending your windfall, set aside enough money to cover taxes.
• Set goals and budget. A windfall may dramatically change your life goals. Think about them and write them down.
• Invest your money. Only after you’ve established short- and long-term goals and set up a budget should you consider where to invest some or most of the money. A modest windfall can grow into a a much larger windfall if it’s properly invested.
• Watch out for scams. Big money winners are besieged with get-rich-quick schemes, some of them outright fraudulent.
• Check your emotions. Few people are emotionally prepared for suddenly coming into a large amount of money.
• Review your estate plan. You may need to update your will or create a trust or a gifting programme.
• Hire financial professionals. Carefully choose advisers for tax advice, investment advice and estate planning help.

WINDFALL TIPS
• Stop! Look (for a financial planner). Listen (to his or her advice).
• Find an adviser who will invest your money in the same investments he or she invests in.
• Don’t do anything until you have created a plan for multi-generational wealth.
•Don’t invest in anything you don’t understand.
• Play it safe with a diversified portfolio of mutual funds or Exchange Traded Funds, which are funds that track indexes.
• Don’t invest more than five percent in any single stock.
• There is no such thing as a sure thing.
• Avoid all “investments” that a stranger tries to sell you over the phone or Internet.92