Armchair Millionaire Community Bulletin: Making the Most of a Windfall

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A windfall can provide the financial opportunity of a lifetime, or sow the seeds for heartache. Which is in the cards for you? It all depends on whether you take a sensible, long-term outlook, or get carried away by the emotions of the moment.

Receiving a windfall is certainly a nice dilemma to have, but you're wise to recognize that pitfalls can lurk behind your good news. No doubt you're familiar with the stories of lottery winners reducing their jackpots from millions of dollars to zero in just a few years.

It's always useful to see how others react to similar situations. We recently asked members of the Armchair Millionaire community who had received windfalls to tell us how they reacted. Here are two of the responses we heard:

"I paid off credit cards and other personal debt, set aside cash reserves, bought a two-year old Corolla, bought a computer, purchased health insurance, leased a nice apartment near the ocean, bought some badly needed furniture and invested most of the money in balanced mutual funds." --TTT

"I spent too much of my inheritance before I calmed down. Should have gone to a fee-only financial planner immediately." --is24

Most of the windfalls that people receive--whether they're from an inheritance, retirement buyout, lawsuit settlement or even the lottery--are not enough to propel them to the ranks of the rich and famous. This makes it critical for you to not abruptly upscale your lifestyle to an unsustainable level. This is precisely the mistake made by all those lotto winners who end up in bankruptcy.

But a windfall can do some very important things for you. It can enable you to reach your most important financial goals faster. It may put some goals within reach that before were only dreams. And perhaps most important, it can provide a layer of financial security that will relieve you of many of the day-to-day money worries that most people face.

To receive these benefits from a windfall, however, you have to manage it correctly from the get-go. My checklist provides the most important steps.

At first, do nothing. It's not unusual to feel a range of intense of emotions upon receiving a windfall, from jubilance to guilt to deep uncertainty. These emotions can make it difficult to make good choices, so put off any big decisions about the money until you're on a more even keel. During this period, resist the urge to splurge on a big-ticket item or, even worse, to quit your job. Instead, continue on as before, allowing yourself plenty of time to evaluate your options.

Set your goals. If you hadn't already given thought to your long-term financial goals, now is the time to do it. You should clearly define when you want to retire, how much income you want in retirement, how much you want to set aside for children's educations and how much you want to spend on any large purchases, such as a new home. Each of these goals will form the basis of your plan for managing your windfall.

Receive professional tax advice. Your windfall will carry tax consequences of one kind or another, and could be substantial. See a CPA who can help you with tax planning. Get professional investment advice. A qualified financial advisor should create and implement an investment plan that's appropriate for your financial goals, time horizon and risk tolerance. By taking this kind of methodical, disciplined approach to investing your windfall, you'll vastly increase your chances for success.

Before you invest, take care of the basics. Set a solid financial foundation before you drop all you money into new investments. If you have high-interest consumer debt, for instance, pay it off. Set aside three to six months' worth of expenses in a liquid emergency fund. Make sure that you have adequate life, disability and personal liability insurance.

The Bottom Line: A windfall can provide the financial opportunity of a lifetime, or sow the seeds for heartache. Which is in the cards for you? It all depends on whether you take a sensible, long-term outlook, or get carried away by the emotions of the moment.

The Armchair Millionaire Weekly Survey: Has insurance come through from you when you really needed it? Log on to http://www.armchairmillionaire.com and let us know.

Lewis Schiff founded the Armchair Millionaire Web site in 1997. His first book, The Armchair Millionaire, was published in 2001. Schiff's newest report, "How to Know When You Are Rich," is now available at http://www.armchairmillionaire.com.

Contact Information:

Lewis Schiff

Armchair Millionaire

877-833-2823

http://www.armchairmillionaire.com

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