If you are wondering “what to do with a large sum of money,” that is probably a good sign. It means you likely sold a business, exercised stock options, received an inheritance, or something equally exciting. In other words, you are experiencing something wonderful yet unfamiliar and potentially unnerving because, in addition to excitement, you may feel overwhelmed, confused, fearful, or even distressed. Strangely, that’s normal, even expected, to the extent that psychologists have dubbed this condition “Sudden Wealth Syndrome.”
As a holistic financial planner, I have helped many people navigate such situations, so I wanted to share what I know. Hopefully, we can help turn your anxiety into confidence.
Why Would Large Sums of Money Cause Distress?
When someone finds themselves the recipient of a significant financial windfall, it can be surprisingly stressful because it means they face a change. And unfortunately, people often resist change, even positive change, because it challenges our perception of who we are and how we fit in the world, which is uncomfortable and isolating. It puts us in a state of mental limbo in that we think we must figure out the “right” thing to do before moving forward.
Since very few of us receive training on what to do with a large sum of money, this situation often breeds neurotic behavior. People become obsessed with studying the economic environment and stock market as if they are responsible for quickly becoming experts. That sparks the kind of questions I typically hear from such people who want someone to explain things like:
- Whether today’s market is good or bad.
- The best time to invest.
- The effect of interest rates and their expected movement on the various investment options.
Unfortunately, the honest answer is that you will never feel completely prepared and comfortable that there is a “right” time to enter the market. Investing is a long-term game that requires detachment from our typical day-to-day thinking.
Therefore, I suggest you put everything aside for the moment and take a big breath. In most cases, there is no rush to make decisions. Instead, let the reality of what happened sink in, then take inventory of how you feel and what you want before developing a plan. Then, read on for some tips about what to do next.
8 Tips for Managing a Large Sum of Money
1. Consider Hiring a Financial Advisor
The phrase “large sum of money” could mean different things to different people. So please understand that I will assume that you have come into a lot of money or inherited sizable assets for which you do not have an obvious, immediate need. Presuming that is the case, my first suggestion would be to hire a CFPⓇ practitioner who can help you determine what to do right now and how to plan for the future so that your money will last. Finding someone whose knowledge and experience give you confidence that you will make good decisions is key.
A good financial planning professional will partner with you through this process, connecting you to other professionals (such as tax advisors or estate planners) while providing the unbiased advice you need to make confident financial decisions. They might even be willing to temporarily work with you to help you protect yourself and get on the right track.
Of course, you don’t have to decide now, but please keep this in mind as you proceed. You are not alone.
2. Establish a Temporary Holding Place
One of the first questions you may have when you learn about a financial windfall is where you should put the money while deciding what to do with it. Your initial thought might be to open a savings account with a reasonable interest rate or to put the cash into a money market fund. However, it is vital to think this through because the source of the money matters, as does the title you assign to the account. To give you an idea of what I mean, consider the following:
Example 1: An interesting fact that many are unaware of is that inherited money may not be a marital asset until you put it into a joint account, even in community property states. So, before you put inherited money anywhere, think about your situation.
Example 2: Another thing to consider is whether you or anyone in your family has a pending liability issue. When you place money into an institution, the account receives a title. That title is critical because it impacts a creditor’s ability to claim those assets. So, if you just came into a large amount of money, ensure you are mindful of how you title any accounts.
3. Clarify Exactly How Much Money You Have
It is tempting to splurge a little when you get a lump sum of money. But try to understand the precise magnitude of your windfall first because it may be different than it seems. There will be tax implications (income taxes, capital gains tax, or estate taxes), of course, and (once again) the source matters.
For instance, if someone acquired your company and you are about to receive a payout, that’s great! However, it is essential to understand the terms of the arrangement. If they expect you to continue working (in return for another payment), that will affect your cash flow and tax situation.
Likewise, if you inherited the money, the exact nature of the inheritance will influence your situation. An inherited annuity, for example, is treated differently than an inherited stock account or life insurance policy. The IRS taxes gains from an annuity as ordinary income, so if you are in a high tax bracket, you may owe a lot in taxes, diminishing the size of your windfall. If this is the case, there may be some strategies you can employ to limit the tax obligation over time.
4. Keep the News to Yourself
When you receive a sudden influx of wealth, keep it secret (at least at first) and try to stay humble. Here’s why:
We start to identify with the situation whenever we share news about our lives. And once other people know (and start having opinions), our ego kicks in, influencing our choices. As a result, you may find yourself promising large sums of money to friends, family, or charity before understanding exactly how much you will receive.
Incidentally, this is why so many professional athletes end their careers broke. Their egos take over, and they spend too much money on things they don’t need or can’t afford. So, although I would never suggest you keep the news to yourself forever, consider waiting until you get a chance to absorb the information. That will buy you time to decide what you want to do before announcing it to the world.
Now, I realize there are times when keeping such information private is impossible. In that case, please refer to tip #1.
5. Develop a Financial Plan
Once the initial flurry of excitement is past, spend some time thinking about your financial and life goals, then create a plan for reaching them.
Creating a financial plan allows you to explore what you want from your life now and in the future. Then you take stock of your assets, liabilities, and sources of income and project how your financial situation will likely play out over a given period of time. Since you just received a financial windfall, this will probably be enjoyable and illuminating.
The plan will make projections showing you how long the money can be expected to last, given your current situation and spending habits, so that you can make intelligent financial decisions. Consider asking what type of spending will “break the plan.” That becomes the upper barrier for spending money or giving it away.
A financial plan can provide peace of mind because it will help you understand how much you can spend today (on things like charity, vacations, or your dream home) and how much to save for the future. That will make it much easier to discuss your new riches with confidence.
Please read the six benefits of financial planning to learn more.
6. Establish a Safety Net
When you develop your financial plan, be sure to build in big buffers. That will empower you to have some fun with your money without worrying about sacrificing your future. You can even use your plan to experiment with different scenarios.
To come up with an appropriately sized safety net, ask yourself the following questions:
- How much cash do you want to have on hand for emergencies?
- How much do you plan to spend in the next 12 months?
- Do you want to give any money away? If so, how much and when?
- Are there any significant expenses coming?
There is no right or wrong answer to these questions because everyone will have different comfort levels. But once you know how much money you want to keep in an emergency fund, you can tackle the next steps.
7. Develop a Strategy for Managing Liabilities
When people come into a large sum of money, one of the first things they often think to do is pay down debt because debt can be a source of stress. However, some debt is okay as long as it is utilized prudently. Many wealthy people take on debt because they can put their money to use in other ways.
So, develop a strategy for managing your liabilities as part of your financial plan. If you have high-interest credit card debt or student loans, for example, by all means, pay it off. However, if you have a mortgage with relatively low interest, most will tell you to leave it be and invest any cash into your retirement accounts where it can grow.
If you are behind on your retirement savings, I tend to agree. However, if your retirement savings are on track and paying off that mortgage (and making a lump sum investment in your house) would give you joy, do it! The entire point of financial planning is to use your money as a tool to live the life you want to live. So if living under the shadow of debt makes you miserable, and you can afford to pay it off, please do!
8. Invest Any Cash You Don’t Need
Any sound financial plan, such as the one you developed in step five, should include a strategy for saving for your future. After all, the main reason why I choose to provide these tips is to ensure that your money lasts. However, that doesn’t necessarily mean you must invest all your money into the stock market.
For example, you might prefer to invest some money into assets that can eventually provide a source of passive income, like real estate. Or, you may want to start a business, help your child pay for college, or buy long-term care insurance. Whatever it is, the point is to find a way to use that money to secure your financial future while enjoying your life today.
That said, investing in the stock market is a great way to grow your money in the long run.
To that end, avoid obsessing over market timing. Instead, perform a risk tolerance assessment and create a mix of investments that will be comfortable for you, then invest your funds using a dollar-cost averaging strategy. Dollar-cost averaging involves investing at regular intervals (vs. all at once) to take advantage of the market’s natural highs and lows and smooth things out over time, minimizing stress.
The Bottom Line: What to Do With a Large Sum Of Money
Receiving a large sum of money does not happen every day, so I want to wrap this up by saying, “Congratulations, you deserve it.” And I would encourage you to make the most of it by considering what this newfound wealth means to you. That will help you get into a much better space to make sensible decisions that will put that money to work while protecting your future.
And don’t forget to download our checklist of issues to consider when experiencing a sudden wealth event. That way, you will have this information (and more) at your fingertips.
