Making Cents - Don’t make a mountain out of a molehill

THIS week’s article is inspired by two people, the first is billionaire Adam Wilkinson and the second is a person who contacted me recently because they received a windfall of sorts in that they inherited a large amount of money from their late fathers’ estate, and they wanted to know what they should do with it.

Let me tell you very quickly about Adam Wilkinson first because before he became a billionaire, he had nothing. He came from very humble beginnings. His parents always worried about money and that impacted him when he was younger, and it always influenced his relationship with money as a child and later when he became an adult.

So his problems with money seesawed from having none to having too much. And I learned about him from reading his excellent book, Never Enough. What I found particularly interesting was when he spoke about the time he started to make a lot of money. And initially it made him very happy, but also very worried and a friend of his subsequently told him that he had a molehill mindset, and that was having a pile of money that he wanted to protect.

And why was that different from before? Because now he had something to lose. And that terrified him and made him anxious and rightly so.

And I come across people like him all the time, strike that, I don’t, not people of his wealth anyway but I do encounter people who have enough money where they’ll never have to worry about paying bills ever again, but they too have that same worry about losing it.

And interestingly there’s a stress related term called sudden wealth syndrome which people can suffer from. And the greater the amount people receive the greater their anxiety can become, and this is a very common side effect of suddenly being in receipt of a lot of money. And this stress can lead people to doing all sorts of things that could hijack their newfound wealth.

Anyway, the definition of a financial windfall is when you receive an expected or unexpected sum of money and it could come from sources like an inheritance, a redundancy payment, winning the national lottery or the local GAA’s one, an injury or medical malpractice award, a life assurance or serious illness payout or from the sale of a property or business.

And the amount could run into the thousands or hundreds of thousands and even into the millions. And for some people having €10,000 lodged into their account is life changing and for others it would need to be €1,000,000. Everyone’s circumstances will be different, and money has a different meaning to each person as well so the impact an amount has on one person may not be the same on another and that’s fine.

What’s important however is what steps you should follow if you were to receive an unexpected, let’s call it windfall, where the amount you receive is meaningful for you and what you should consider doing with it because it could have the potential to create long term financial security for you and your family.

So, whether you’ve received €10,000 or €10,000,000 I’m going to put forward some ideas and suggestions as to what you should consider doing if a large sum of money suddenly lands in your account.

Take your time

The good news is that when you receive any money, you don’t have to do anything with it immediately, and you shouldn’t. You should take your time and consider carefully what you want to accomplish now and, in the future, and then set a plan in motion.

The amount you receive may seem like a lot now but if you spend it too quickly it won’t feel like it was much in a few years’ time, so as hard it might be not to splurge and treat yourself, I’d say take your time because it's proven that those that do will have better outcomes than those who spend or act too fast.

Get advice

If you’re unsure what to do with this new money or you have an idea, I think it’s worth consulting with an experienced qualified financial adviser to get advice from them and perhaps get an opinion from them to see if what you’re thinking of doing i.e. buying a property, paying off debt, investing it, gifting some of it, buying a business etc. are good ideas and financially rewarding or not.

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Keep it quite

It mightn’t be a great idea to share your newfound wealth with everyone because it may attract requests for money from relatives or friends you haven’t seen in a while or from people you don’t even know.

Or maybe you don’t care, and you want to tell everyone and that’s fine as well, just be prepared for different reactions from people who might become jealous or envious of your newfound wealth and how they react to you may not be like what it was before.

Put the big purchases on hold……………for the time being

Money in your account on Thursday and buying a big car or a new property on Friday is not a good idea.

It’s not that the purchase of a car or a property is a bad one, it's making the decision to do it so soon after you have this new money is.

There are many other factors you have to consider, and you need to be able to think clearly as to what you want from this new money. You want to have no regrets soon after spending it, which is why maybe putting a time limit and monetary limit on purchases above a certain amount is a good strategy.

Pay off high-interest debt

If you have debt that is being charged in the high single digits or worse, is in the double digits then it probably makes sense to clear them off because it’s very unlikely you’ll get a return with an investment that will match the cost of your debt, unless you take on some high risk with your money and why take that risk when you don’t need to.

And always ask yourself this question, can I get more on deposit than the loan is costing me, and if you can’t then consider paying it off provided you still have money left over and provided you trust yourself that you won’t get into debt again because it you do, then paying off old debt would have been a big waste of part or all of your windfall.

Invest

It may sound very boring, and you may not get much of a dopamine hit from setting up a savings or investment account but it’s important you do something with your newfound money that is sensible and will grow in value over time.

And from an investment perspective you probably have two options with the money you receive, and they are:

(a) investing a lump sum

(b ) Invest on a monthly basis

Some people might prefer to use the lump sum they receive as a feeder account to invest into other accounts on a monthly basis and the reason they might do this, or they might have been advised to do is because (1) they don’t want to tie up any part of their money for any period of time. They want to have access to all of it, but they still want to invest some of it each month and (2) perhaps they’re just nervous about investing a lump sum at the wrong time i.e. when markets are high, and they just don’t know when is a good or bad time so they’d prefer to invest their money on a drip feed basis each month where there will be months that were good to invest and months that were bad to invest.

Regardless of whether it’s a lump sum or a regular monthly saving, make sure the account you invest into suits your risk profile and you know exactly what the account is and what explicit guarantees it gives or not, or what guaranteed returns it gives, or not.

Financial windfalls happen all the time and it’s exciting to receive money you perhaps weren’t expecting but like what happened to Adam Wilkinson, it can feel overwhelming as well. You’ll feel lots of emotions over what you should do with it i.e. spend some or all of it, or save it all, or gift some of it, or wait and do nothing. There will be lots of these thoughts swirling around in your head.

And I have multiple clients who received big windfalls from the sale of businesses or from lottery winnings, and some won really big. And interestingly what they all have in common is that they all still work, and they’ve all made excellent well thought out investment decisions as well. And yes, they’ve all spent a lot of it as well, but critically they’ve all stayed grounded and if you ever met any of them, you’d never think they have millions in their accounts.

And if you asked them what money has given them? I think they’d say freedom, freedom to do whatever they want to, but if you’d ask them, has the windfall made them happier? I think they’d probably say it has, but not by very much either.

Because the things that tend to make people happier are moments spent with family and friends and helping others, not spending time in big empty houses wearing designer clothes and driving big expensive cars.

Liam Croke is MD of Harmonics Financial Ltd, based in Plassey. He can be contacted at [email protected] or www.harmonics.ie