Karyn won three million dollars in the lottery, a dream come true. She remembers reading about previous lottery winners and the fact that most had little to nothing to show for their luck after two years. Karyn was determined to not let that happen to her.
When his mother died, Randy was left with a substantial amount of cash from her estate. While his parents had lived frugally all their lives, Randy is better at spending money. However, he doesn’t want to fritter away his inheritance.
Jayne, a new widow, received over a million dollars in life insurance proceeds when her husband, Mike, died. Its purpose was to maintain her lifestyle in just such an event. With two young children, money matters should be the least of her worries.
Most people who suddenly receive a substantial amount of money are not prepared to handle it. We have all heard about the lottery winners who vowed they would not let the money change their lives, but soon became the best customer at the local auto dealer, travel agency and electronics store.
It can be hard to resist going on a little spending spree. But all too often it is virtually impossible to stop buying until the money is all gone. It is vital to enlist the help of a professional financial advisor.
When someone “comes into some money” like in the examples above, it is important to take some time before making any big financial decisions. This may be a few weeks or several months.
It is critical to set some realistic financial goals. They should include:
Pay off non tax deductible debt
Pay off debt – The debt with the highest interest rate first. With interest charges on credit card balances as high as 20% or more, these should be paid off right away.
Catch up on RRSP and tax free savings account deposits – In Jayne’s case, she can even maximize her husband’s RRSPs too. This will reduce or eliminate the taxes on his final tax return. She can roll his RRSPs, tax-free, into her name and keep postponing taxes until she retires.
Review life insurance
Review life Insurance – It can be tempting to let policies go if there is lots of cash on hand. Some types of insurance products can be used to build up investments and save taxes at death. Imagine making premium payments with pretax dollars as opposed to after tax. Your estate will need liquidity when you die and the taxman will need to be paid. Life insurance is the best way to do this.
Invest most of the money for income – Think of a large amount of money as a “cash cow” that gives you milk in the form of income. If you slaughter the cow, it can’t produce milk. So, if you spend all the money, it can’t generate income.
There are investment products that can guarantee income for your life and that of your spouse.
Karyn can still get herself some nice things, but she can use the income from her cash cow to pay for them. By leaving the cow alone, she still has a steady income. Part of the planning that Mike and Jayne did included a home free and clear. She can use the income to continue making mortgage payments and she will still have the income when it’s paid off. Randy can top up his RRSPs and buy a nice home, paid for with his new income. -M Dumond