Keys to Financial Wellness

By Stephen Fournier, President, Central New York Market, KeyBank

There are many ways to come into money, from happy winnings to uncomfortable settlements. Regardless, whether your windfall comes from a legal settlement, insurance claim, inheritance or lottery prize, the burden of an unexpected lump sum of cash will likely be heavier than you realize. The reason: most people treat windfalls different than earned money, and the resulting outcome too often is a loss of wealth, strained relationships and increased financial and mental stress.

The issue most people face when they come into money is they don’t know what do with it. Unlike the income we earn, we don’t have a plan for windfalls. It’s not part of our budget, so it’s easy to think of it outside the scope of our day-to-day expenses and long-term financial goals. This is the mistake. When newfound money is not part of our plan, it’s easy to spend. It’s also easy to overestimate its true value.

Press pause on the payout…and plan

The best “first” thing you can do with a financial windfall is nothing. Exercise financial discipline. Put the money into a savings account or money market fund until you develop a plan for what you want to do with it. This will allow you easy access to the funds if needed. Another option is to set up a short-term CD.

The next thing you should do is assemble a financial team that can help you minimize tax liability and coordinate the construction of an investment portfolio that integrates with your short- and long-term financial goals. This team should consist of a certified financial planner, certified public accountant, estate planning attorney and an insurance professional. Their primary role is to help you make informed financial decisions. It is important that you take the time to interview your team and be comfortable they are a fit. Remember, they will be working for you.

While each individual situation is unique, there are some guidelines you should consider.

• Five for fun. It is a windfall, after all, so splurge—but only a little. Limiting yourself to spending less than five percent of your windfall will protect you from reckless financial decisions that can have serious long-term ramifications. Any niceties beyond that initial five percent should fit into your strategic financial plan.
• Don’t check out. As strong as your desire may be to quit your job, carefully think it through. Is the windfall really enough to replace the lost income, social security and possible health benefits you’ll be walking away from?
• Pay off debt prudently. It will be tempting to use your windfall to pay off your mortgage or your child’s student loan, but it shouldn’t be your priority. Your overall financial health should come first. Repayment of debt obligations, including credit cards, should be accounted for in your financial plan. Also, before you start paying off your debt, set aside a six-month emergency fund.
• Prioritize long-term security. Define your life goals. Maybe you can’t call it a career, but perhaps you can be happier and make more money by changing careers. Investing in more education could provide you with a good return. Also, goals establish benchmarks for evaluating the performance of your investment portfolio. Looking ahead also helps you define and mitigate risk based upon your desired outcomes.
• A helpful exercise you can undertake is to create a spreadsheet of how you might like to allocate your windfall. Include categories such as retirement, long-term savings, short-term savings, emergencies, fun, charities, etc. It’s a process that will help you think about your windfall more responsibly and will provide your financial team with a good overview of your values and goals.

Execute your plan

Financial windfall or not, the key to financial security is to develop a plan and execute it. A financial windfall definitely presents you with more opportunities, but leveraging it for financial independence is not without pitfalls and does not provide a guaranteed outcome. That’s why it is important to work with your financial team to develop a plan you can live with. With their help, the decisions you make regarding your career, retirement, real estate transactions, charitable giving and estate planning will be sound and informed.

As you move forward through life, it’s important to understand that your plan is not static. It needs to be a living, breathing strategy that evolves as you grow. It also needs to adapt with and adjust to the demands of future market conditions. Your financial team should meet with you at least annually to ensure your goals are still being met.

At the end of the day, a financial windfall is a blessing. Whether it’s $10,000, $500,000 or $10 million, it should not be the curse that too often it becomes. It’s an opportunity, and proper planning—aided by a skilled financial team—can help you leverage the opportunity into something that improves the overall well-being of you, those you love and even the causes you care most about.

Stephen Fournier is president of KeyBank’s Central New York Market. He may be reached at either 315-470-5096 or [email protected]. 

Who should be on your financial team—and what they should do

For most people, the expertise and experience required to successfully navigate the financial and legal challenges that come with a financial windfall are not in their toolbox. This is why nearly every financial professional and attorney will offer up the same advice to anyone who comes into a large sum of money: don’t do anything until you can assemble a strong team to guide you. At minimum, your team should consist of an attorney, accountant, and financial planner. Here’s the role each should play:

• Attorney – Attorneys aren’t just for people who come into money. In general, anyone who has an estate that exceeds what can be distributed to their heirs without penalty would be well advised to have an attorney. The attorney will help to organize asset protection around three areas: lawsuits, income taxes and estate and retirement planning. You will want an attorney with estate planning experience. You don’t go to a heart surgeon for brain surgery. Attorneys specialize as well.
• Accountant – A comprehensive, integrated tax management plan is critical to the development of your overall wealth strategy and the achievement of your financial objectives. Taxes can be imposed at the individual, trust, estate and business-entity levels, impacting almost all aspects of your financial life, from business and investment income to wealth transfer and estate planning techniques. Licensed accountants, known as certified public accountants (CPAs), can work with your financial team to develop an in-depth understanding of your individual tax exposures and reduce your tax liabilities. CPAs are required to complete regular continuing education and conduct their business according to specific industry standards.
• Financial Planner – Financial planning is a process that results in a customized financial plan. It includes recommendations and strategies for asset allocation, risk management, retirement planning, estate planning and, if your needs require, education planning and business planning. Your financial planner guides you through this process. In many instances, financial planners are the team lead, ensuring that your personal plan to grow, protect and preserve your wealth is executed and carried through to success. Look to work with a certified financial planner (CFP). The CFP designation is difficult to earn and indicates technical proficiency in all aspects of financial planning. You also want to work with a planner who has a track record of success, can provide referrals and demonstrates an understanding of your values and individualized goals.

The team can also include an insurance professional and your banker. Ultimately, the goal is to combine the skills of these professionals to effectively deal with any financial and legal issues you may encounter.