By Julie Knutsen,
Department of Accounting, Finance and Economics
“If someone came to me seeking advice, after suddenly falling into $100 million, I would advise them to …”
Strongly consider setting foundations in place which minimise stress and maximize cashflow for a lifetime. In other words create a genie bottle which would supply the magic forever. To do this, patience, knowledge and quality advice would be essential and certainly worth the investment of time.
Suddenly winning such a large sum of money could be like driving to work in the morning in a modest car, earning a modest wage to then being given and handed the controls of a learjet in the afternoon. The leap is huge and a crash is inevitable if you take off without the skills, the knowledge and the practice. To avoid a crash, the alternative is to employ a qualified pilot to show you how to fly and teach you to navigate a safe flight-path and to manage the jet in good and bad weather. When competent, you are not only qualified to fly the jet, but you can take on passengers who could also enjoy the benefits of high-flying.
There are plenty of stories of people winning lotteries and then within a short space of time being bankrupt. Tragically, there are those who sought financial advice and also went broke. The lottery winners (or rather lottery losers) spent the money without thought given to how it could work for them. Falling victim to poor financial advice has in recent times been as much about not taking personal accountability for understanding the advice as it has been about adviser misconduct.
So to enjoy, sustain and protect the benefits of a $100 million I would suggest the following plan of action.
Step 1
Firstly, identify the current financial stresses in your life. If it’s a mortgage, pay it out. If it’s the credit card, pay it off. There is strong evidence which puts financial stress as the source of ill-health and premature death. So remove the immediate financial stress, take the next steps and make the money work for you, for a lifetime.
Step 2
Second, seek out quality and trusted financial advisers with the capability and willingness to coach, to educate and to empower personal accountability and control in relation to making financial decisions. It is highly likely the way forward will require a change in financial behaviour and heightened levels of financial literacy. Licensed financial advisers using a coaching approach focus on simulating financial education as part of the advice process. This enables the client to develop financial skills safely until they have the confidence to invest with real money. For the winner, having the confidence and competence to judge good investments for themselves, would be like having the competence to co-pilot their new learjet.
Step 3
Third, continue the financial coaching and learn how much capital is needed to be invested to generate an annual income that provides the winner with the desired lifestyle. For example, if a year of adventure around Australia, without financial stress was going to cost the winner $100,000, they will need $2,000,000 invested at 5% which would generate sufficient interest to pay for the trip whilst keeping the capital for other adventures. Over time however, the purchasing power of money is reduced by the effects of inflation. To manage that threat, growth investments such as property and shares would be need to be considered. With any investment, however there is risk. Understanding the risk, being prepared for the risk and having structures in place such as contingency funds, accurate and consistent budgeting is as important to a winner of $100 million as it is to someone seeking financial wellbeing on a modest wage.
Step 4
Fourth, give serious thought to how better to manage requests for financial support. My favourite philosophy comes from Benjamin Disraeli who suggested ‘the greatest good you can do for another, is not just to share your riches but to reveal to them their own’. Like the owner of a learjet, when you know how to fly one you can show others and take passengers along the journey with you. There is grounded research which demonstrates that handouts of money rarely help individuals in financial hardship. Instead supporting them acquire better financial skills could generate a richer outcome.
Step 5
Fifth, consider purchases that nurture the soul. For example, create learning opportunities that enable the winner to discover new talents and/or set-up philanthropic situations where money can be leveraged to serve many people. The actor, Paul Newman set up a company that produces tomatoe sauces that is self-sustaining and benefits a range of worthy causes.
There was a time, I might have wished for more money than I know what to do with. But now, I do know. So if I win, these are the steps I will take.
Ms Julie Knutsen is a Lecturer in Financial Planning at Griffith University. Her international career spans more than 30 years in merchant banking, stockbroking, counter trade and financial planning. Ms Knutsen is currently researching the benefits financial coaching in the professional financial advice context.