If you received a windfall of $100,000 net of taxes, what would you do with the money?
You may be thinking along the lines of paying off debt or taking that long-desired dream family vacation. Maybe you’d fund college savings for your children, boost your own savings and investing, or provide a meaningful gift to charity.
Most of our clients have very specific financial objectives and seek our guidance in how best to attain what they consider to be most important and in the right order of priority. For some, this amount of unexpected extra money would check a few boxes. When asked, they’d probably even say from an objective standpoint that they would use the money responsibly to advance their long-term goals.
Think about how freeing it might feel to have these options. Now, here’s the real question: would you truly use the money responsibly?
While it can be easy to answer in the affirmative, the reality is one might be vulnerable to multiple cognitive and behavioral hijacks leading to alternative choices.
Marketing executives and advertising agencies have long utilized the “windfall gains effect” to entice unplanned consumer spending. If you’ve ever gone to the store for a specific set of items and left with 2 of something else because of a buy-one-get-one discount offer, you’ve experienced the windfall gains effect first-hand. Because the discount was attractive and you didn’t want to miss out on a good deal, you spent more than intended due to the perceived savings.
We often see the other side of this fallacy in financial planning, which is known as the “sudden money” effect. Sudden money can come in the form of an inheritance, a large bonus, sale of a major asset, or even lottery winnings. After the exuberance of the windfall wears off, one might experience emotions ranging from anxiety to guilt to uncertainty when considering what to do with the money.
Your money scripts –what you tell yourself about money that shapes your financial decisions – may cause you to act from a scarcity mentality, or to spend the money on items and experiences you’ve never been otherwise afforded. You may also experience difficulty making decisions about the money. There’s even a likelihood of experiencing a feeling of loss attached with this money being used for any purpose.
No matter the health of one’s relationship to money, sudden or unexpected money is best approached from a careful planning perspective and understanding of your values and objectives. This work ideally begins long before the money finds its way into your hands.
The financial planning process aligns your values, goals, and risk tolerance to identify and implement the right strategies to help you achieve all your financial dreams and live brilliantly. Need help? Call us at 602.923.9800 for your complimentary initial consultation. We would be honored to be of service.
Together, we can work to keep you on-track towards your financial goals. Request a consultation with me to learn more.
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