Ted Jenkin, CFP®, AAMS®, AWMA®, CRPC®, CMFC®, CRPS®
Co-CEO and Founder oXYGen Financial, Inc.
Request a FREE consultation: www.oxygenfinancial.net
Coming into a large sum of money is a game changer for people of all ages. Unfortunately, there are lots of different decisions to consider upon receipt of these windfalls which causes most individuals and families lots of consternation on what are the smart money moves. Whether these dollars are received from inheritance, cashed out stock options, or a gift, it is imperative that you make a smart plan or you can easily squander your newfound fortune. Recently, I helped several folks from different walks of life when Airwatch was bought out by VMWare. This instantaneously created a new set of millionaires. Here are the ‘your smart money moves’ ideas to make when you come into a large sum of money.
1. Do Nothing For 60 Days (unless you are right at the end of a tax year)- When people inherit property, cash out stock options, or receive a gift, far too often I see people immediately buy themselves something or sell assets too quickly. Make sure you take a complete inventory of everything you currently have, pay to get a financial plan done, and simply build yourself a due diligence period before making any concrete decisions. Allowing this time to pass will give you the ability to make more fact based decisions than emotion based decisions.
2. Lead With The Tax Sword First- Based upon the size of the overall lump sum, you need to clearly understand the tax implications. Will this push you to a higher income tax bracket this year? Are their gift tax or estate tax implications? Certain assets may have received a step up in cost basis which could affect the timing on when you want to sell certain assets. If you have inherited qualified assets such as an IRA, 401(k) plan, or an annuity, there will be financial choices that involve complex tax decisions. Remember, if income gets too high now you could have extra federal income tax, Medicare tax, Obamacare surtax, and more.
3. Pay Off Debt– Do all the financial calculations you want. Most stockbrokers or investment advisors will assure you that they can do better over the long term with your money than the after-tax cost of borrowing on your debt. After almost twenty three years in the business, the happiest people I have counseled are the ones that have little to no debt. Pay off your non-deductible consumer debt first, and then pay off any other debt you can afford to with the leftovers. It may not be a trip to the Bahamas, but doing this will really build a great foundation for your financial plan…
4. Agree On A Cash Reserve- If you don’t already have one, take at least 6 months of your total expenses, and put a chunk of your cash in reserve type instruments. I generally keep a year of cash in the bank, but that is just my preference. A savings, money market, or credit union type account will work just fine. You never can tell what will happen with your health or your job, so paying off debt and having a reserve are two very smart steps.
5. If You Want A Toy, Buy Only One– If you have never had a large sum of money, it’s somewhat indescribable how it burns a hole in your pocket. If you have always wanted a small boat, a high end piece of jewelry, or a minor fix up to your house, just get it out of the way. Do NOT sell your house and buy some big monstrosity of a mansion in another part of town. That is a HUGE mistake.
6. Get Some Money Away You Cannot Touch- It’s hard to let go of the cash, but get some money tucked away in something you get to (at least without a phone call). If you are younger, put a lump sum away long term for retirement or your children’s education. If you are older, have someone professionally manage a certain amount for you that would require a call before you got it wired back in your bank account. I promise that if it sits in your savings account, you’ll figure out how to spend it.
There are many other issues to consider, but these are some key ones you should keep in mind. Think taxes first, debt/cash reserve second, toys third, and then get the rest put away according to your overall financial plan.
oXYGen Financial, Inc. co-CEO Ted Jenkin is one of the foremost knowledgeable professionals in giving financial advice to the X and Y Generation.