35% of lottery winners of more than one million dollars are in financial difficulty or have filed bankruptcy within 10 years of winning. So what should you do if you come into a windfall (lottery, inheritance, stock option buyout, court settlement, etc)? Here are some tips:
- Cooling off period. Don’t do anything at first. Don’t go on a spending spree or go crazy. Don’t quit your job just yet.
- Split up the money. Federal Deposit Insurance Corporation (FDIC) is capped at $250,000 per depositor, per insured bank, for each account ownership category. Split up the money on CD’s, money market funds, and short-term securities until you devise a longer term plan.
- List your immediate needs and then your secondary goals. Are you heavily in debt or in poor health but have no insurance? Be realistic and practical.
- Talk with an accountant. You have to pay taxes on your windfall and will most likely be in a higher tax bracket.
- Watch out for scams. People want to take your money.
- Update your will or trust. More money means you need to review your plans.
- Invest gradually allocating your money into different stocks, bonds, and mutual funds. Index funds may be a good idea. If you have a lot of money, I strongly recommend using a professional advisor. Stay fairly conservative and don’t forget to fund a college plan for the kids and an IRA for yourself or spouse.
If you are lucky enough to get a windfall, make sure to use the money wisely. Also, don’t forget to give to your favorite charity.