How to Handle a Sudden Financial Windfall

Transcript

We have a question from D, “A learn what do you do with a large windfall? Do I follow FOO or can you jump steps like pay off the mortgage and do that early?”

So it’s like a checkerboard, yeah? So the Financial Order of Operations exists for a reason, right? The reason we came up with a Financial Order of Operations is so that as you’re making financial decisions, you have a litmus test that you can work through to make sure that you’re staying inside the guardrails. Well, the good news is, if you have a large lump sum come into your possession, it shouldn’t be incredibly difficult to bang out some of the FOO levels pretty quickly, like you can do them in quick succession. What I would encourage you to do is, I think oftentimes, and Brian, I want to hear you speak to this a little bit, a lot of times when people come into a big windfall, they start rushing into making rapid decisions. Okay, I just sold my business for five million dollars, I need to go buy a million-dollar house, or oh man, I just got an inheritance of five hundred thousand dollars, I need to go pay off the three hundred thousand mortgage, or I really want the new car or now it’s time to do the windows, or now it’s time to fill in the blank of the things that you want to start doing with that money. What we often encourage people to think about when you have a large lump sum come into your possession is to move very slowly as it comes to making decisions. A lot of those things we threw out, whether it’s buying a new car, buying a new house, or paying off the mortgage or any of those things, may not be bad, but you want to make sure that you do it in the right order, that you’re making the decisions understanding what the unintended consequences of that decision may be because too often, we’ll see someone who got a lump sum made a bunch of bad decisions and then after those bad decisions were made, they come and try to have us kind of help pick up the pieces. We’ve had a lot of experience with this, Brian. What are some of the things that you would say or some of the things you’ve counseled people to do when it comes to receiving a windfall?

Well, I thought you did a good job because you kind of the first thing is this whole slow down, don’t let somebody push you into making a decision quickly under some false pretense that there’s a requirement of something, so take a deep breath, especially when you come into money. Why are so many lottery winners broke? It’s because I think that they are frivolous. They’re not purposeful, they’re not beginning with the end in mind of knowing what the why is. And then I would use the financial order of operations with a windfall to, when you do decide to take action, to accelerate the steps, but you still need to pay respect to the steps, and let me explain why. I’ve shared, and I got a lot of you guys were really mad that I said this, and I shared this, oh my gosh, I can’t help how what people tell me in my life is that I had the widow in my Sunday school class who, when she got to know me and knew what I did for a living, she said, ‘Look, I’d like you to use me as a cautionary tale to tell people when they come into inherit a big chunk of money because their spouse passed away, don’t just immediately go out and pay off the debt because somebody had told me that hey, you know the best thing you can do to change it with this chunk of money that came into your possession is, um, you know, go pay off the mortgage. Because then, you know, no matter what happens, you’ll own the house and you’ll be risk-free. And what they didn’t know is this pretty, because that’s people who give you off-the-cuff advice like that, you know. Um, they don’t really know your situation.

This is why we always tell people to hire a financial advisor so you’re not doing things for the first time yourself. You actually have somebody who has experience, because this is the type of stuff I work with. I work with a number of widows, and I would never, never immediately just say, “Do not pass Go, pay off debt.” Maybe that’s the answer, but what this person who gave this advice to this widow, who now goes around and actively pulls me aside after a Sunday school class and said, “Make sure you tell people this cautionary tale, use me as the example.” I think if somebody would have known the full picture, they’d be like, “Hey, this person doesn’t have a full emergency reserve. This person doesn’t necessarily have how they’re going to have their living expenses secured in the future, and liquidity. That type of stuff would have been unveiled, you know, uncovered, and we could have been much more purposeful. Because you know what happens when you pay off a mortgage? What are you going to do? The only way you can get money back out is to go refinance. Well, when you go refinance, guess what the underwriters are going to do? Where’s your sources of income? They’re going to give you all kinds of trouble. And then the other thing is like, how are you going to pay the property taxes? How are you going to pay, even if you… How about this? What if you had a mortgage at 3 percent and somebody tells you to go pay it off with a lump sum, and you do it, and then a year goes by and you want to refinance and all of a sudden rates are at 7 percent now, right? Like, that’s problematic. So I know a lot of people said, “No, this would never happen because somebody would have emergency reserves. They’d have it.” You don’t know. And that’s why I tell you, you do not skip steps to the financial order of operation. This is not a game of checkers where, good for you that you got $200,000. That means that $200,000 should immediately go down to pay down the mortgage.

What if you don’t have cash reserves? What if you have credit card debt that needs to be paid off? What if you have credit card debt that needs to be paid off? What if you’re not maximizing your employer’s match? What if you haven’t done any Roth accounts or HSAs if you have them available to you? There’s a lot of things that could be left behind if you turn the financial order of operations into a game of checkers and start skipping steps. That doesn’t work. And I think one of the things you might hear is, “Oh man, these guys are awful. If I win the lottery, I’m not coming to talk to them, no way, no how.” That’s not true. We just want you to have a plan in place. You may be surprised to find out that a lot of times when we have someone who either sells a business, wins a lottery, sells a piece of land, or has a large windfall, part of our plan might be for some piece of that to be blow money. “Hey, let’s chisel this off, and this is going to be the new car, the new house, the pool, or whatever that thing is.” Great, but it needs to be part of the plan, not just the first impulsive thing that you rush to do, because that thing that you rush to do may force out some things that you need to do when that windfall comes in.