Cash windfalls are a nice problem to have. They can plump up bank accounts either unexpectedly (lottery jackpots or out-of-the-blue inheritances) or expectedly in the form of hefty performance bonuses or proceeds from the sale of a business or other major asset.
For most people, though, there are potential pitfalls to avoid when dealing with that money.
The classic examples of what not to do with sudden wealth come from the ranks of Canada's lottery winners. There are numerous sad stories of rags to riches to rags lottery winners who burn through their winnings in just a few years, ending up with a collection of expensive toys and not much else.
Kurt Rosentreter, a certified financial planner with Manulife Securities in Toronto, has worked with three lottery winners and has found the experience frustrating. "Sadly, all of them found their way to me about a year after they won."
Two of the three had less than half of their multimillion-dollar wins and had made pretty much every wrong decision: all had gone on spending binges before creating a financial plan; all had decided to retire before figuring out whether it was economically possible.
Even after meeting with an advisor and drawing up a financial plan, the money didn't last. "They all spent it all within five years."
The odds of a lottery win are minuscule, but the life lessons of jackpot winners extend to people who face any sudden influx of wealth.
Rather than being "found money" that comes with no strings or expectations attached, it should be viewed as a resource that needs to be nurtured and tended.
It is the default position of most financial advisors to encourage people to take a breath and then get down to planning what to do with that sudden cash pile before spending it.
Jamie Golombek, managing director of tax and estate planning at CIBC Private Wealth Management, has a different take.
"Our first general tip that we give people if they have a sudden inheritance, a windfall, lottery win, depending on the size obviously, is to take some of that money and spend it right away," he said. "That will sort of get out the urges, the impulse to do something crazy."
That does not mean blowing half the windfall. For Mr. Golombek, that splurge might consist of 5 to 10 per cent of the newfound wealth, spent on something like a dream vacation or coveted automobile.
As for the rest of the money, he advises people to put it into a short-term guaranteed investment vehicle creating a "cooling off period" during which the money will be safe.
"That allows you to really get some good advice. Financial advice, estate planning advice, tax advice and investment advice so that you end up making good, long-term decisions. Because these major windfalls, inheritances, lottery winnings can really have a huge impact on your life."
Entrepreneurs who might sell their small to mid-sized business for a seven- or eight-figure sum might seem as far away from a lottery winner as one could get, but in many ways they are very similar. Both face a sudden influx of wealth and the prospect of a distinctly different lifestyle.
"One day you own the widget factory and all your cash flow, income and comfort level comes from the company, and the next day you have a pile of cash, and for many business owners that is quite disconcerting," says Susan Latremoille, director of wealth management with the Latremoille Group at Richardson GMP in Toronto.
"A lot of them have had all of their money tied up in their business and all of a sudden there is a pile of cash and they are dependent on this money, this cash, to support them for the rest of their lives."
Ms. Latremoille also adds this scenario into the category of sudden wealth: a divorce settlement paid to a financially dependent spouse.
"Whoever we are talking about, the need for planning is critical. If you just sit on it with the interest rates that they are today and the cost of living, it just does cost more to live and the purchasing power will not be maintained at current interest rates," she explains.
"So if you want to generate income and grow this capital, then you have to have a plan and you have to have a framework for making decisions."
Often that will require seeking an advisor or financial team of professionals who specialize in higher-income individuals and their different needs.
Ms. Latremoille has worked with many such clients who sought to "upgrade" from a bank branch advisor who sold mutual funds and GICs to a service such as hers.
She also worked with a wealthy couple from a small town in southern Ontario who would come into the big city when it came time to manage their finances.
"They did not want their business known by the bank or anyone in this small town, so they came to Toronto to seek anonymity, to seek an advisor, an accountant, everybody. I don't think anyone in the town knew exactly how wealthy they were."