The 4 biggest money mistakes ‘overnight millionaires’ can make
Unexpectedly receiving large amounts of money can potentially change the course of your life – but only if the money is used wisely, according to Ester Ochse, Channel Head for FNB Advisory.
“It’s important to understand that managing a large amount of money is not easy and the first instinct for most people is to spend, especially on big ticket items such as cars, holidays or expensive jewellery,” she said.
“While a bit of self-indulgence is acceptable, uncontrolled spending could lead to wastage. Therefore, it is important to seek help about how you can manage your money.”
Ochse explained that in addition to dealing with the financial implications of a windfall there were many psychological one has to consider. This includes saving and investing with a clear head and understanding that social dynamics with friends and family are likely to change in some way.
“A sudden bulge in your bank account from an inheritance, for example, is hard for most people to fathom. They spend before committing to any sensible financial decision such as investing the money towards education.”
Ochse laid out the following tips for anyone who has been fortunate enough to receive large sums of money.
Pay off your debts first
Ochse noted that it was important to tackle your outstanding debts as soon as possible, not only to relieve the burden but because then you can direct your money on building more wealth. She also noted that once the debts are paid in full, it was important to keep them that way and resist the temptation to take up debt unnecessarily.
Don’t quit your day job
According to Ochse, many people are tempted to quit their jobs when they receive large amounts of money. She noted that while you now have a financial security blanket to fall back on, quitting comes with other limitations including the loss a regular income as well as any potential benefits you would have accrued as an employee of the company.
You still need to prioritise emergencies
Having an emergency plan to cover your living expenses due to unforeseen circumstances is important, said Ochse.
“If you didn’t have one prior to receiving a windfall, now is the good time to start. Ideally, you should have enough money to cover six months living expenses. The savings must only be accessed in the event of serious need such as a medical emergency.”
The financial advice you should be looking for
Because a windfall can fundamentally change your financial situation you have to take into account (or re-evaluate) your estate planning, lifestyle and your investment objectives, said Ochse.
“Therefore, it is recommended that you speak to a certified financial advisor who will assist with achieving your short and long-term goals.”
“For individuals who are already financially stable, see it as an opportunity to diversify your investment portfolio. This is where goal-based financial advice could help you tailor a plan that will help you realise your long-term financial aspirations,” she said.
Read: What a R2 million home looks like in Joburg, Cape Town, Durban and other major cities
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