Financial Planning: Everything You Need to Know About Your Money (Almost)
The guide to managing your finances, in good economies and bad.
(In a word, be patient.)
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Carol E. Arnott, CFP, CDFA, CHFC
Greenville Financial Group
In addition to helping individuals, couples and business owners, Arnott helps people wade through the financial ramifications of divorce settlements. A frequent speaker, she’s appeared on Fox 29’s morning show and she regularly writes columns for local publications. Arnott was named Women in Business Champion of the Year for 2008 by the Small Business Administration’s Delaware Office.
In these economic times: “Don’t panic. Turn off the 6 o’clock news. As hard as it is to do, get the emotion out of the process because that’s what’s driving the market right now. Then revisit your portfolio to make sure your plan is in line with your goals.”
MANAGING A WINDFALL
Who hasn’t imagined winning the lottery? What would you do with the money? Even the thought of a $10,000 inheritance or insurance settlement can make you write a mental wish list.
Few, however, are prepared to cope with receiving a lump sum.
“No matter the size of the windfall or where it comes from, it’s often all gone within three years—or some 95 percent of it is gone,” Dawson says.
Here are some tips to help you get some bang from that buck.
Consider the tax implications. If you win the lottery, expect the government to come calling. That’s also the case with many other lump-sum windfalls. Find out if you need to set aside money to pay Uncle Sam. Otherwise, you may need to cash into savings or IRAs when you’ve spent the windfall.
Don’t rush into anything. Refrain from going shopping until you create a game plan. “Put it somewhere where you can earn a little bit of interest, and think about what you want to do with that money,” Berg says. “It does change lives.”
Keep in mind that the Federal Deposit Insurance Corporation provides deposit insurance that guarantees checking and savings deposits in member banks up to $100,000 per depositor. So if you’re single, you’d need to split your $200,000 inheritance check between two FDIC-member banks.
Pay down any bad debt. Unlike your mortgage or a home equity loan, bad debt is non-deductible. Consider your credit card debt, for instance, or a car loan with a high interest rate. Pay that off if you can.
For those who can’t keep their credit cards in their wallets, Townsend takes it a step further. “Take your scissors and cut your credit cards in half,” he says. “Otherwise you’ll be right back where you were. It takes discipline.”
Discretion is the better part of savings. Won the lottery? “Don’t tell anyone,” Dawson says. “You laugh, but you’ll find out how popular you are. Schemers come out of the woodwork.”
He recalls the column he wrote on what to do if you received a lump sum. Suddenly, he received letters from petitioners who believed he had access to people with wads of cash. “It was heart-wrenching,” he says. “It was bizarre.”
Set goals. Jon D. Walton is a big fan of planning for the future. He’s keen on short, medium- and long-term goals.
Your goals will depend on the dollar amount. Nearly everyone can find a way to spend $10,000. A $400,000 insurance settlement will require more thought and care.
If you’re talking about $10,000, don’t deny yourself after paying off bad debt and planning for taxes, Walton says. But if you could put even a portion of a modest windfall into a worthy goal such as educating your child, do so. Larger amounts require long-term goals, such as retirement planning.
“You’ve done yourself a big favor if you address a lump sum this way,” he says.
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