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A substantial boost in your personal wealth can happen overnight. You can win the lottery, inherit an estate or profit from a business sale. Many people aren’t prepared for a sudden windfall, making it difficult to know which steps can protect that money and grow it long-term to last a lifetime. If this sounds like you, you may want to talk to a financial advisor. But here are seven steps to manage sudden wealth.
1. Create Long-Term Goals
Long-term financial goals provide a clear roadmap for managing sudden wealth by offering guidance and focus. When individuals come into a significant amount of money, there may be a temptation to make impulsive decisions or engage in extravagant spending. Establishing long-term financial goals helps to channel this windfall into a structured plan, ensuring that the wealth is used strategically and in alignment with broader financial objectives.
Sudden wealth can also bring increased financial risks, including investment pitfalls, tax implications and potential scams. In this sense, long-term financial goals can act as a risk mitigation strategy by promoting a diversified and balanced approach to wealth management. And in doing so, you could adopt a cautious and well-researched approach, safeguarding your newfound wealth from unnecessary risks.
Finally, long-term financial goals can also help you preserve wealth. By focusing on the bigger picture, you can prioritize building a lasting financial foundation. This can involve strategies such as investing in a diversified portfolio, creating an emergency fund and planning for retirement.
2. Find Professional Help
Hiring a financial advisor or wealth management expert can provide you with essential knowledge and experience that is necessary to effectively manage sudden wealth. Professionals are well-versed in various financial strategies, investment opportunities and risk management techniques. Therefore, they can help you create a personalized and comprehensive financial plan for your specific needs, objectives and risk tolerance.
There are different types of professionals who can assist in managing sudden wealth, including financial advisors, tax specialists and estate planning attorneys.
Financial advisors play an important role in planning your financial future by devising prudent investment and spending strategies that can align with your specific needs. Tax specialists, on the other hand, will help you make tax-efficient decisions and potentially avoid significant tax burdens.
3. Create a Realistic Spending Plan
A spending plan can help you outline anticipated income and expenses. By gaining a clear understanding of your finances, you can position yourself to budget and control expenses, prevent overspending and avoid impulsive purchases that can easily eat into your sudden wealth.
One common spending plan to consider is the 50/30/20 budget rule. This strategy allocates 50% of income to necessities, 30% to discretionary expenses and 20% to savings and investments.
4. Build an Investment Plan
An investment plan can provide you with the structure and direction to achieve long-term financial goals. Because investments can generate returns that outpace inflation, a well-diversified portfolio could help you mitigate risks by strategically allocating funds based on financial goals.
Additionally, an investment plan can be structured to generate steady income, which can turn a sudden windfall into a long-term investment. By including income-generating investments like dividends, interest-bearing instruments, or rental properties in your portfolio, you could create a reliable cash flow to support your lifestyle and financial goals. This income can help you buffer economic downturns or unexpected expenses.
5. Protect Your Estate
An estate plan can help safeguard your wealth or assets from potential risks and issues, including unnecessary taxes and legal complications.
Sudden wealth often comes with significant tax implications, and estate planning strategies like wills, trusts and tax-advantaged accounts can help structure your estate to take advantage of available tax benefits.
Estate planning can also help protect assets from creditors and legal challenges. This is particularly important when managing sudden wealth, as it can attract attention and potential claims. By incorporating trusts or other protective measures in the estate plan, you can shield your assets from certain risks and keep your financial affairs private.
A financial advisor can help you navigate the nuances of estate planning and surrounding laws.
6. Resist Large Purchases or Lending to Family
Sudden wealth can tempt you to make extravagant purchases or provide substantial financial assistance for a loved one. But such actions could also deplete your resources quickly. By exercising restraint, you could maintain a more sustainable financial position to help ensure long-term wealth.
First and foremost, you should note that making large purchases or lending substantial amounts of money can lead to debt. Sudden wealth may create a false sense of financial security, and this could make it easy for you to spend more than your means. Therefore, restricting impulse buys and spontaneous lending with a budget or financial plan can help you preserve that sudden wealth effectively.
7. Build a Life Plan
Building a life plan will require you to reflect on personal goals and priorities. Sudden wealth can bring about a whirlwind of opportunities and decisions, but having a life plan could help you clarify what truly is most important for you and align financial decisions with core values.
A life plan will also encourage you to consider short- and long-term goals. Sudden wealth can tempt you to focus on immediate spending and other types of indulgences that could undermine your long-term financial security. So adding short- and long-term goals to a life plan, can help you strike a balance to secure your financial future.
Bottom Line
With practical strategies and tools, you can manage sudden wealth to help secure your financial future and achieve life goals. If you fall into this situation, it’s important to set a budget, invest strategically, protect your estate, resist impulsive spending and to craft a life plan.
Tips for Managing Wealth
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A financial advisor can help you create a financial plan to protect your wealth. Finding a financial advisor doesn’t have to be hard. SmartAsset’s free tool matches you with up to three vetted financial advisors who serve your area, and you can have a free introductory call with your advisor matches to decide which one you feel is right for you. If you’re ready to find an advisor who can help you achieve your financial goals, get started now.
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One of the most important things to do is to invest a substantial amount of your money so it continues to grow over time. You can use an investment calculator to help you find the right balance and help you see how well it will grow.
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Keep an emergency fund on hand in case you run into unexpected expenses. An emergency fund should be liquid — in an account that isn’t at risk of significant fluctuation like the stock market. The tradeoff is that the value of liquid cash can be eroded by inflation. But a high-interest account allows you to earn compound interest. Compare savings accounts from these banks.
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The post How to Manage Sudden Wealth in 7 Steps appeared first on SmartReads by SmartAsset.
