Many Canadians at some time or other probably have dreamt of getting a major financial windfall that will change their lives.
Depending on how you look at it, windfalls can be either positive or negative.
Winning the lottery, selling your home for a large price, hitting it big on the stock market or getting a large bonus or stock option from your employer are all positive events.
But there are negative ones as well, such as getting a severance package from losing a job or getting an inheritance due to the death of a close family member or a loved one.
Windfalls are emotional events that can trigger irrational decisions.
Winning the lottery can create a sense of euphoria and an urge to spend the money while getting an inheritance due to the death of a loved one is born out of grief and can prevent the recipient from making a sensible decision.
Patricia Lovett Reid, senior vice-president of TD Waterhouse, suggests that people park their money in safe, short-term money market instruments until they’ve had time to step back and reassess their entire work, life and financial situation.
Next, people should gather all their financial information, take an inventory of their assets and liabilities and get hold of other important documents such as tax returns, insurance policies and pay stubs. This information will help in the formulation of cash flow projections to see how much of a lifestyle change they can afford.
It’s also a good idea to check if the windfall has any restrictions. An inheritance, for example, may have a clause stating that only income can be paid to the beneficiary rather than a lump sum payment.
Decide what you want to do with the money. Some short-term options could include paying off debt, such as a mortgage or credit card; contributing to your RRSP, catching up on unused room carried forward from previous years or putting the money into a registered education savings plan for children or grandchildren.
“Some common planning mistakes to avoid include not developing a detailed financial plan, not setting performance benchmarks, not monitoring and periodically evaluating your plan and not sharing enough information with your financial advisor,” said Lovett-Reid. “You should endeavour to build a globally diversified investment portfolio of stocks, bonds and money market instruments,” she suggests.
Assuming you will be fortunate enough to pass on the family wealth to your next generation, it is just as important to pass on values to go along with the money.
In 1986, investment guru Warren Buffett was quoted as telling Fortune Magazine that he was leaving the bulk of his fortune to charity because one should leave “enough money to your kids so they can do anything, but not enough so they can do nothing.”
Many wealthy parents face the problem of children not being motivated enough to succeed on their own as they are too busy enjoying the wealth that has been passed on to them.
“Money is a measure of success and source of influence,” said Lovett-Reid. “At an early age, it can be easy to get swept away by the power of money, resulting in children cultivating an unhealthy relationship with it.”
One solution is communication. Develop an inclusive family style of taking decisions about money.
Parents should help kids discover their value system for money. Kids are easily influenced by parents, so parents should practise what they preach.
“Teach children to become self-reliant, pursue their interests and work towards a professional career or start a business,” said Lovett-Reid. “Motivate them to develop a good work ethic. Reward them for positive achievements. And, at the right juncture, let them know how the wealth transfer will happen as part of your estate planning process.”
Talbot Boggs is a Toronto-based business communications professional who has worked with national news organizations, magazines and corporations in the finance, retail, manufacturing and other industrial sectors. He can be contacted at boggsyourmoney@rogers.com.