Won the Lottery?

Learn How to Not Be Broke Again Three Years from Now!

Hello! David J. here again with more of the steps on my journey to financial independence.

Was just watching a show on Cable called, "The Lottery Changed My Life". This episode featured a Canadian family who won a fairly modest jackpot, $4.5 million.

Like most lottery winners, they first fed their feelings of deprivation by going out and indulging in luxuries like cars, outdoor recreational vehicles like ATVs and such, even a country home on multiple acres.

Something you never hear on these shows, though, is what they did to preserve their "wealth" after first satisfying their needs to no longer feel "deprived". So, I thought I'd fill in here with some suggestions.

Now, of course, I'm not a big lottery winner, and my personal fortune is still "under construction".

I am blessed, however, to be connected to a group where financial education is available - education of a calibre about which the average college student can only dream. So, this is from my learning, not my experience.

I'm going to propose a four(4) step process:
Step 1: Asset Protection
Step 2: Debt Reduction
Step 3: Income Production
Step 4: Wealth Preservation

Note that I am not a licensed financial professional and am NOT authorized or qualified to give financial advice. This is, again, from what I've been learning. Please take it as such.

I may cite numbers over the course of what follows. Please do not take them as either accurate or "gospel". I'm typing this entirely from memory - what I've learned as I understand it.

Step 1: Asset Protection

Upon any large burst of income or any windfall, the first thing to have in place is a plan for asset protection. As soon as you acquire something that someone else may want to take away, you need to put yourself in a position of control without the appearance of possession. That is, if someone wants to try and sue you to gain control of your wealth, you must first have put that wealth out of reach of such attempts.

On paper, you must look like you have nothing of value - nothing worth suing you for.

Control does not require possession. "Control everything, own nothing".

Step 2: Debt Reduction

When we get a sum of money like an inheritance or a bonus or some other payout, one of the first things many folks always want to do is to pay off debt.

Now, that IS a good thing. The trick, however, is to pay DOWN debt, and do it without imposing a sudden big change on your credit position.

By paying down big balances all at once, you actually paint a picture of yourself which, while it may appear to help you in the short term, in the long term may actually hurt your credit profile. Sure, your scores will surge upward, initially. However, they'll gradually slide back down if you stop using your credit and interrupt your history of payments. Your scores may end up being lower than before you acquired your windfall.

What you'll want do first is devise a pay-down plan for your personal unsecured debts like credit cards and personal credit lines. Exclude your home equity line for now - we'll discuss that later, and its a secured debt, anyway.

You'll need a financial calculator. One recommendable option is the official HP 10B-II emulator app for the iPhone, or the HP 10B-II calculator itself or its predecessor, the HP 10B. Actually, any calculator that handles financial calculations should do nicely. You'll be figuring out the payment amounts to pay down or pay off your personal credit accounts over a period of time which you decide.

For each account, calculate the payment amount for the time period you've decided for paying down your personal debts: 24 months (2 years), 36 months (3 years), 60 months (5 years), or whatever you choose. Use the current interest rate on each account, even if the interest rate is variable. At this writing, there is little indication of interest rates changing much in the near term (within five years) - subject to change, of course, since no one can predict the future.

Once you have the monthly payment amount for each account, multiply that times the number of monthly payments you've selected. Total all these numbers for all your accounts. This will be the amount you'll set aside for debt reduction and elimination.

What you want do so is set up all your personal credit accounts so that they get paid automatically every month out of a special account you set up just for that purpose. Actually, you will want two accounts: a money-market or other interest bearing account which pays more than an interest-bearing checking account would, and an interest bearing - or truly free - checking account.

Start the new checking account with the minimum balance to avoid monthly charges (if any) plus the total of a month's payments on your personal credit accounts.

Set up the money-market or other interest bearing account with the total of all the monthly payments, and arrange to have it transfer to the new checking account an amount equal to the total of your monthly personal credit account payments every month. Money-market and other interest bearing accounts usually have a monthly transaction count limit; so, this should work well - one withdrawal per month set up on an automatic transfer to your new checking account. Leave the money in this account solely for the purpose of funding those automatic transfers and making the automatic payments.

Some banks allow you to set up these automatic transfers through your on-line banking. Contact your institution for details if you need them.

That said, I must also say that I don't promote paying cash for some large purchases when credit will do just as well if not better. Remember: money you don't pay out until necessary is money that can work for you earning income.

So, for any new large purchases do the same thing: figure out how soon you want to pay it off, figure the monthly payment amount at that rate, the total number of payments and the total of all those payments. Add that amount to your money-market or other interest bearing account, and set up those monthly payments to be automatically drawn from your new checking account every month. Adjust the monthly transfer from your money-market or other interest bearing account to your new checking account, as needed.

Every month, the interest earned in your money-market or other interest bearing account can be transferred to another account and used to re-invest or fund purchases. This is an early example of income production - your money working for you, instead of you working for money.

The idea here is not to avoid interest, as most consumers might believe. The idea here is to repair and maintain your credit by setting up timely payments and reduce your credit utilization. This will enable you to get lower interest rates on new accounts, or even to reduce the interest rates on existing accounts.

As for home loans and home equity lines, I'm going to promote the same approach: as long as the interest you're paying on those accounts is less than the income you're making (as we'll discuss next), leave those loans in place and include them in your debt reduction plan. Leave their payoff term as is - 15/30 year or whatever, just allow for the automatic monthly payments which will grow your credit standing and repair your credit profile, if needed.

If your equity line's monthly payments are interest only, use your financial calculator to determine a payment which will amortize that line before it renews or resets the next time (not the current period, unless it just renewed/reset).

If your home equity line is a true "balloon" and does not renew or reset, then consider paying it off in full, if possible.

I've intentionally avoided mentioning transferring your debts into business entities for the obvious reason that I believe it is better for you personally to improve and fortify your own credit status so that you may more easily acquire credit for any business entity you may choose to set up.

It's entirely valid to transfer your windfall into one or more business entities - that could be part of your asset protection plan. All you need do, then, is to have that(those) entity(-ies) make your monthly payments for you.

That said, I would recommend you consider transferring your personal residence out of your personal name and into an entity such as a trust. Your legal professional should be able to help you do this. This further reduces your desirability as a lawsuit target. In fact, depending on your unsecured debts, it will probably push your net worth into negative territory.

You shouldn't feel negative about that - remember: the idea is to look as unattractive as possible as a potential lawsuit target.


*Whew*! This is getting a bit long! Let's break here, and continue in the next post!

Look for it in a week or so.

We'll talk again soon!

Take care - be well!

Much Success!