Suddenly coming into a large amount of money, can be difficult to manage. Not just financially, but emotionally.
→ Nearly 33% of lottery winners declare bankruptcy.
→ 15.7% of NFL players went bankrupt within 12 years of retiring.
→ 40% of professional footballers (soccer) go bankrupt within 5 years.
→ 70% of families lose their wealth when the second generation inherits it.
Not having enough money clearly wasn’t the issue, it’s how you manage it.
Quitting your job might be at the top of the list when you win the lottery, but it’s important to know what kind of lifestyle your money can support, and how to best use it.
Set aside an emergency fund
Before spending or investing a penny of your newfound wealth, setting some aside for the unforeseen is prudent. It also helps make your long-term plans, more sustainable.
For example, if you later choose to use some of your money to pay off debts, an unexpected financial event won’t force you start racking up your credit card again.
Or if you invest, it stops you having to sell when markets are down, and you need access to cash.
The size of your emergency fund is really a personal number, it depends on what other income and expenditure you have.
A good starting point is 3-6 months of living costs, plus any big purchases or expenses in the next 1-2 years.
Pay off high-interest debt
Next, it’s time to start tackling high-interest debt, like personal loans, credit cards and car loans.
Broadly speaking, anything with an interest rate over 6-7% per year, is worth paying off.
This is because the interest your paying is likely to compound quicker than the return on your savings and investments.
Start by making a list of your debts, and what the annual amount of interest (APR) is.
Rank them from highest interest to lowest, and pay them off in that order.
Think carefully about paying back low-interest debt
Being debt free appeals to a lot of people, knowing that everything you own is yours, can be powerful.
But carefully using debt, is a superpower of the ultra-wealthy.
You see for debts with interest lower than 4-5% year, you can reasonable expect a diversified investment portfolio to outgrow the interest.
So by not paying off the debt, and investing the money, you capture the difference between the interest cost, and the investment return.
This of course depends on how much growth your investments target, and how comfortable you are with volatility.
Invest to support your lifestyle
There’s over 1,000,000 different investment solutions out there.
It’s easy to get sucked into focusing on growth, or income, or cost, or return, or risk.
But what you need are investments specifically chosen to support your ideal lifestyle, today and in the future.
So before making any investment decisions, you need to identify what that looks like. Think about key questions, like continuing to work, or retiring earlier.
If you’re thinking about stopping work, what will you do to find purpose? And what will your lifestyle cost?
Cashflow modelling software, can help you understand how far your money could go, and the options you have (a worthwhile exercise before quitting your job!).
These choices will help inform decisions around asset allocation, and ensure your investments are seeking the right balance between growth and risk.
Cash is unlikely to be the right solution
Decision paralysis might make you think about keeping your money in the bank, and putting off the decision of investing.
Whilst this feels secure, and it might seem like there is more than enough, it will only lose value to inflation.
Over the last 20 years, uninvested cash has lost significant purchasing power.
But diversified investments like stocks and bonds, have continued to provide real growth over the long-term.
Have an estate plan
Leaving a legacy, is important to many people receiving a large inheritance or a lottery win.
You probably want to make sure your money lasts, and supports those you care about.
By thinking about estate planning early, it can help to maximise your wealth.
Updating your Will is essential to make sure your assets are distributed as you wish, and there is no confusion when you’re gone.
Tools like trusts, can ensure money isn’t frittered away after you die and is spent in line with your wishes.
Trusts can also help mitigate the impacts of inheritance tax or estate duties, so there is more left over for your loved ones.
And life insurance can provide liquidity to deal with an inheritance tax bill, whilst other funds are going through probate and difficult to access.
Want to understand how your wealth can support your future?
If you’re an expat with over £150,000 to invest, arrange your complimentary initial consultation today.
