As a professional in the financial industry, it always amazes me when I read of studies showing a significant percentage of Canadians that plan on winning the lottery as major part of their retirement planning. Considering that I do not personally know of anyone that has won even as much as $50,000 in a lottery, I am even more surprised (and saddened) when I hear of the even greater percentage of multimillion dollar lottery winners that are broke within 5 years. Although it is quite rare to win a substantial amount of money in a lottery, many of the same elements are present when one receives a large inheritance. On the surface, one may think that large inheritances are equally as rare but given the current real estate values in the Greater Vancouver area, it is certainly quite common for several hundred thousand dollars or more to be passed on via an inheritance. It is also quite common (and prudent financial planning) for substantial amounts of money to be passed on to financial dependents via life insurance proceeds from an untimely death. Whether one receives a large financial windfall from a lottery or inheritance, there are definitely noteworthy similarities. In both circumstances, one suddenly receives a large sum of money that they previously did not have and usually there are a lot of emotions that arise from this event. If left unchecked, these emotions often result in impulsive purchases or gifts to friends and families. These are two key components almost always present when lottery winners have gone broke after a short period of time.
One effective strategy of ensuring that this does not happen is to resist doing anything significant until the emotions have settled. Even though it may be tempting to immediately tell your boss what to do with the latest project that he or she has given you, this may lead to you being on a permanent vacation with no one else to spend it with unless you pay for them to come with you.
Once the strategy of resisting doing anything significant has been implemented, one can then begin creating a wish list. Often times this exercise allows one to quickly realize that no matter how much their windfall is; one’s wish list (which may or may not include world peace) is much greater. Prioritizing these wishes is the next step, which oddly enough is the same process one would go through if they created a financial plan. The key here is ensuring that one considers their short, medium and long term wishes/goals so that everything can be put into perspective. What use is getting that brand new Lamborghini if it comes at the expense of eventually having to move in with your in-laws? As this process is quite dynamic, with every choice impacting every other choice, professional advice is often recommended.
Troy Peart BBA, CFP, CFA can be emailed at firstname.lastname@example.org. Your questions comments or suggestions for future articles are encouraged.