Wealth creates challenge
Receiving an inheritance or selling a business can be a great financial opportunity. But it can come with challenges.
There is an old adage, 'shirtsleeves to shirtsleeves in three generations', meaning that wealth gained in one generation will be lost by the third. Why? Simply because those who receive it are often ill-prepared to make good decisions about it.
Equally this problem can apply to high income earners. A 2009 report from Sports Illustrated1 found 78% of retired NFL players in the US had gone bankrupt or were under financial duress within two years of retirement.
So, what if you do find yourself in receipt of sudden money – large or small? There can be no hard and fast rules. We are all different – our ages, whether we have mortgages, our job situations. But we should all want to first of all draw breath and take a moment. Decisions don’t have to be made immediately. Allow yourself time to let your newly received money and the options you have with it to settle in.
A likely first step will be getting your finances in order. Repaying a mortgage in part or whole will need consideration. High interest debt such as a credit card should certainly go – with a plan for not recreating it.
Then set up an emergency fund that provides a buffer in case of illness or accident or an unexpected run of expenses.
Which isn’t to suggest that you shouldn’t spend any on lifestyle and fun. Perhaps a trip. Or the car you’ve always wanted. But those shouldn’t be the first decisions you make. Take a moment to think about tomorrow as well and spend in the context of a plan. What if you invested a portion? What might it grow to by the time you reach retirement? Or might it give you the choice to retire early? Knowing the answers to those questions will help you decide how much to spend on current lifestyle.
How are the funds then invested? Creating wealth (unless it is in an inheritance) often involves taking a higher, concentrated, level of risk – perhaps owning a single business or property. Once the gain is earned though keeping it becomes the focus and diversifying your investments and thereby reducing risk is prudent. That doesn’t preclude higher risk, higher return investments. But they come after the solid foundation has been built.
Our future outcomes will be driven in part by the returns we earn, which in turn will be an outcome of the mix of investments we choose. Establishing the right mix for you between income and growth investments is vitally important and merits input and learning from others if you don’t have the expertise yourself.
Maximising your outcomes is more than just about return though. It requires an understanding of the variety of risks that exist, including the need to protect the funds from inflation. While leaving the funds in bank deposits alone might seem easy and safe the loss of future spending power could be significant.
Like many other areas of life taking the time to have a plan can make a huge difference to your outcomes.
There is an old adage, 'shirtsleeves to shirtsleeves in three generations', meaning that wealth gained in one generation will be lost by the third. Why? Simply because those who receive it are often ill-prepared to make good decisions about it.
Equally this problem can apply to high income earners. A 2009 report from Sports Illustrated1 found 78% of retired NFL players in the US had gone bankrupt or were under financial duress within two years of retirement.
So, what if you do find yourself in receipt of sudden money – large or small? There can be no hard and fast rules. We are all different – our ages, whether we have mortgages, our job situations. But we should all want to first of all draw breath and take a moment. Decisions don’t have to be made immediately. Allow yourself time to let your newly received money and the options you have with it to settle in.
A likely first step will be getting your finances in order. Repaying a mortgage in part or whole will need consideration. High interest debt such as a credit card should certainly go – with a plan for not recreating it.
Then set up an emergency fund that provides a buffer in case of illness or accident or an unexpected run of expenses.
Which isn’t to suggest that you shouldn’t spend any on lifestyle and fun. Perhaps a trip. Or the car you’ve always wanted. But those shouldn’t be the first decisions you make. Take a moment to think about tomorrow as well and spend in the context of a plan. What if you invested a portion? What might it grow to by the time you reach retirement? Or might it give you the choice to retire early? Knowing the answers to those questions will help you decide how much to spend on current lifestyle.
How are the funds then invested? Creating wealth (unless it is in an inheritance) often involves taking a higher, concentrated, level of risk – perhaps owning a single business or property. Once the gain is earned though keeping it becomes the focus and diversifying your investments and thereby reducing risk is prudent. That doesn’t preclude higher risk, higher return investments. But they come after the solid foundation has been built.
Our future outcomes will be driven in part by the returns we earn, which in turn will be an outcome of the mix of investments we choose. Establishing the right mix for you between income and growth investments is vitally important and merits input and learning from others if you don’t have the expertise yourself.
Maximising your outcomes is more than just about return though. It requires an understanding of the variety of risks that exist, including the need to protect the funds from inflation. While leaving the funds in bank deposits alone might seem easy and safe the loss of future spending power could be significant.
Like many other areas of life taking the time to have a plan can make a huge difference to your outcomes.
1. How (and why) athletes go broke, Sports Illustrated, March 2009.
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Stephen McFarlane is an adviser with NZ Funds Private Wealth in Timaru. The opinions expressed in this column are his own. A copy of Stephen’s Disclosure Statements are available on request, free of charge.
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First published in the Timaru Courier on 10 October 2019, as 'Wealth creates challenge.'
