What to Do — and Not Do — With a Windfall

A sudden pile of cash sounds great, but beware these pitfalls.

ByABC News
August 11, 2014, 8:31 AM

— -- Most people wish for a financial windfall, but they should be careful what they wish for. For many, receiving a large sum unexpectedly — or just suddenly — fails to solve the problems recipients thought it would, at least for the long term. And in some cases, a windfall brings less happiness rather than more.

Though many people know they’ll eventually receive an inheritance, many are nevertheless unprepared to handle it. With true windfalls — lawsuit settlements, corporate buyouts, lottery winnings and other large tranches of cash that aren’t long expected — preparation by recipients tends to be even more lacking.

This can lead to disappointment. Some recipients think they’ll never have to worry about money again, but because of the way they handle their windfalls, they end up being wrong about this. Yet, if those fortunate enough to get a windfall quickly develop a new level of discipline to match their new wealth, they can ensure that their good fortune remains good — that it changes their lives in a positive way.

Making up your mind to do this can help you avoid the following negative consequences of sudden fortune, including: New-money-itis. This is my term for the tendency to start spending on yourself and those around you as though the money will never run out. But it always does. No matter how much money comes your way, you can always spend it all — or so much of it that you’ll have thrown away your future. New-money-itis can play tricks on your mind, which blocks out the logical, inevitable result of unbridled spending: being broke again.

Damage to your mental and physical health. Years ago, I had a client who received a substantial corporate buyout to take early retirement at 53. I advised him to invest all of this money to recreate his former work paycheck, but he insisted on putting a big chunk of it in his checking account — the launching pad for spending. Before he got the buyout, he was calm and relatively care free, as his daily routine had been the same for 20 years. But afterward, his routine changed dramatically, as he had nowhere to be every day and no one telling him what to do. Before the buyout, he enjoyed going home to rest after work and rarely found time to spend money. Now he had all day to spend, and spending became an emotional replacement for work. He became nervous, agitated and prone to hyperventilating because he had developed an unhealthy obsession with spending, an unfulfilling endeavor in itself.

Risk to your financial health. You would think that the financial future of windfall recipients is assured. Yet often, windfalls result in a few years of ridiculous spending, amounting to a missed opportunity. This is perhaps true most often of recipients of the greatest windfalls: big lottery winners. Some studies show that about 70 percent of these winners end up broke. Between their heady days of winning and once again living paycheck to paycheck, there’s a period of foolish indulgence and giving in to a parade of sycophants seeking to exploit their friend’s or relative’s newfound wealth. Lottery winners say yes to everyone, leading to their ruin. While precious few people are lottery winners, taking note of this syndrome can be instructive, for it can take hold of recipients of other types of windfalls to a lesser extent.