So, you win a big contest (maybe Servus’s The Big Share™ Contest) and a huge sum of money lands in your lap. Or you inherit some money or sell your business. Or maybe there is a legal settlement with a large payout, or you cash in your pension.
You will undoubtedly feel many emotions: euphoria, elation, relief and possibly a lot of anxiety as well. How will your life change? What is the best way to handle this money?
In the event of a financial windfall, there are road signs that everyone should pay attention to, no matter the situation — “it doesn’t matter if you are blue or white collar,” says Jamie Holmes, Investment Advisor for Servus Wealth Strategies and Credential Securities.
First, if you don’t have one already, find an advisor you trust who has the knowledge and experience to plan your strategy. Sit down with that advisor, strip down your financial picture and get right to the roots:
- Get a full breakdown of net worth
- Update your will: review your estate and trust planning (to minimize estate tax after death)
- Put your documents (bank statements, property deed, investment statements) in order for your executor — it's even more important with a large sum of cash flowing in
- Protect your assets: get enough life insurance coverage
“Basically, go back and ensure the foundation is strong,” Jamie says. “Think of it like a house.”
Then, identify a long-term plan — for five or 10 years — taking into account your financial objectives. Taking out bad debt is number one.
“A lot of my clients harp on me like I am a dad, because I am on them to not spend money,” Jamie says. Emotion is a big part of the equation, particularly in the event of an inheritance after a death in the family. Jamie says he always tells clients to park the money into a high-interest savings account and, if need be, leave it for some time and deal with the loss first. Something like winning a big contest brings a whole other set of emotions. Let the windfall sink in and take some time to process this life-changing event before you make big decisions.
An advisor will help direct where you should allocate your new-found cash. “You can’t just throw your money at anything ,” Jamie says.
Depending on your priorities, an advisor might recommend such options as giving money to the kids to help them with a down payment on a home, or maxing out tax-free savings accounts (TFSAs) or registered retirement savings plans (RRSPs). Donations to charities bring tax write-off advantages.
Overall, in the event of a financial windfall, Jamie points to several things to consider, depending on you, your family needs and financial plan:
- Income needed (monthly/yearly)
- Tax efficiency
- Flexibility of the investment (locked in and open)
- Risk rating
- Inflation rate/tax rate
Options to invest a windfall, according to Jamie include:
- One- to five-year laddered guaranteed investment certificates (GICs). “[A laddering strategy] allows you to have a higher one-year average rate than investing strictly in a one-year GIC,” he says.
- Mutual funds (using a portfolio manager)
- Income-focused market investment (monthly/quarterly dividends to the client)
- Growth-focused market investment
- Stocks and bonds (income stocks and growth stocks)
- “Two-year cash wedge” — “I like to invest into a low-risk bond play that pays 6% per year in dividends and allows me to have the pay cheque monthly to the member. This way if we are invested in the market, members know they have two years’ worth of money set in a low-risk option,” says Jamie.
- “Rainy day money” — a guaranteed high-interest savings account for day-to-day expenses
“A mix of each is a great plan,” he says. “Members need to see the long-term view on the money versus a short-term view.”
Once your financial foundation is strong — with an emergency fund, and retirement and estate planning in place — then you can think about how you might best like to spend the remainder. Perhaps you’ve always dreamed of a long vacation. After all, good fortune is something to be celebrated.
Servus Wealth Strategies Ltd. is a subsidiary of Servus Credit Union Ltd. offering financial planning, life insurance and investments. Mutual funds and other securities are offered through Credential Securities, a division of Credential Qtrade Securities Inc. Credential Securities is a registered mark owned by Aviso Wealth Inc.
This article is provided as a general source of information and should not be considered personal advice. Please speak to your personal financial representative before making any financial decision or implementing any strategy.
™ The Servus logo and the Servus Circle graphic device are trademarked properties of Servus Credit Union Ltd.