While receiving an unexpected financial windfall is exhilarating, the reality is that if you don’t spend it wisely, you could find yourself losing it all faster than the money came into your account.
Ask David Mokoatsi, a lottery winner who reportedly collected a whopping R23 million jackpot in 2015.
Two years later, he claims to have burnt through his winnings following a splurge on property, cars and donations to his church.
He recently launched a High Court bid to recover R4,6 million he claims to have loaned former Bafana Bafana coach Shakes Mashaba’s son, of which he says only R880 000 has been repaid.
“Unexpectedly receiving large amounts of money can potentially change the course of your life. It’s important to understand that managing a large amount of money is not easy and the first instinct for most people is to spend, especially on big-ticket items such as cars, holidays or expensive jewellery,” says Ester Ochse, Channel Head for FNB Advisory.
“While a bit of self-indulgence is acceptable, uncontrolled spending could lead to wastage. Therefore, it is important to seek help about how you can manage your money.”
According to Ochse, these are the most common mistakes that people make when they suddenly come into money.
Not eliminating debt
Debt is the perpetual noose that lingers around most consumers necks and it is the biggest deterrent to financial freedom and wealth creation.
Coming into unexpected money is an opportunity to live a debt-free life, so your first port of call should be to settle all outstanding debt immediately, then focus on staying out of debt.
Quitting your job
Many people are tempted to quit their jobs when they receive large amounts of money, but leaving your job comes with limitations because you’ll be losing not only your regular income, but also additional benefits offered by your company.
READ MORE: Common investment mistakes
Not seeking out financial advice
After clearing your debt, make sure that you consult with a certified financial advisor who can help you draw up investment plans for the short- and long-term.
Not saving for emergencies
In these tough economic times it’s getting harder and harder to save money, so setting up an account for rainy day funds should be a top priority.
The general rule of thumb when saving for emergencies is to have enough cash reserves to cover six months’ worth of living expenses.
“Understanding the psychology of dealing with a lot of money can help you take the right steps to protect your money. Every financial decision must be carefully considered to avoid being in a compromising situation in future,” Ochse says.