In February 2018, Kibera Resident Gordon Ogada was unveiled as the winner of the Ksh.230.7 million SportPesa jackpot- with such amounts Gordon is probably set for life…or is he? For many of us, chances are, that we will never hit such a jackpot in our lives, nevertheless, we might get a windfall now and then. It could be a large payment from winning a court case, an inheritance from a loving aunt, a first salary for a recent graduate with few expenses or for those with an entrepreneurial bone-proceeds from a company sale. However, a sudden cash influx can be dangerous too.
Lovers of the rap music genre will remember 1997 to be the year that acclaimed musician Notorious B.I.G, posthumously released the song, ‘mo money mo problems’. The song personifies the pitfalls of financial windfalls that befall people who’ve lived without much money. More money more problems is more common than you might think, a sudden change in fortune (pun intended) can leave you worse than you were before the money came. Here are five tips to help you manage a sudden cash windfall.
- Create a Financial Plan
When money is in abundance and has come unexpectedly, there is that belief-hidden at the back of the mind that the cash won’t finish. Of course, deep down you do know this to be a lie, but you just can’t stop spending. A financial plan is a great tool to keep you in check, sit down with a financial adviser if possible and go through your options. They will advise accordingly, about the type of investment to go into and what to avoid (like jumping into bitcoin trading without understanding a thing about it).
Clearly map out your needs vs your wants, the availability of money has a tendency to blur out the distinction between the two. Prioritise your needs and deliberately plan for your wants-perhaps it’s your dream car, it’s not bad to buy it so long as you can afford it and it doesn’t disrupt the entire plan.
- Pay Off High-Cost Debts
Once your financial plan is set and done, it’s time to pay-off all your debts that have a high Annual Percentage Rate(APR)-which is the total cost of a loan including interest as well as other administrative costs (you can know your loan’s APR from the Kenya Bankers Association portal. Your cash windfall may not be enough to pay off all your debt at once, so pick the most expensive of the bunch e.g. credit card loans, high-cost microfinance loans from mobile money apps and clear them.
- Create an emergency fund
You never really know how bad things can go in life until they do, set up an emergency fund and only touch it in unforeseen circumstances- not when you need extra money to buy a car. For those of us who perhaps have been fired or retrenched, and a result received a generous compensation. Just remember your situation is an emergency in itself and though it may look like what you’re spending is a windfall, it’s actually your entire emergency fund. A great way to figure out how much to save for emergency is to track your monthly expenditure and then multiply that by the number of months you want to secure, anywhere from 3-12 months.
- Keep your windfall confidential
If you do not want people hounding you and asking for handouts, only tell a trusted few of your sudden abundance in cash. Otherwise, friends that last spoke to you 10 years back and relatives who last thought of you when your great-grandfather was still a young man, will come for their share.
In case they somehow find out, you still have your financial plan and advisers to help deter over ambitious friends. ‘Oh, that’s great! My financial advisor handles all my investment decisions now, send him an email of that great idea you want me to fund, ’ such responses allow you to be firm with your money while still maintaining your relationships.
All in all, a financial windfall is a blessing and thus, do not forget to treat yourself and also enjoy the good fortune, but only do so deliberately-keep going back to your financial plan if you feel yourself losing focus.