John Wall, 19, the No. 1 NBA draft pick this year, and the newest player for the Washington Wizards, used to live in a small apartment with his mother. Now, the teenager is earning a $4 million annual salary, has a five-year, $25 million endorsement deal with Reebok, and plans to buy his mother a house.
Whether you’re on the verge of earning millions like Wall, a Goldman Sachs employee thinking about next years six figure bonus, or more commonly, someone who lost a loved one and gained an inheritance, managing a large sum of money, out of the blue, can be both exhilarating and daunting.
“Whether it is $300,000 or $30 million if you don’t take ownership and accountability in what your future holds and you rely on someone else to do it–your friends, neighbors, or relatives even, who are not educated in the financial world–you’ll lose it all,â€ says Steve Piascik, CPA, president of Piascik & Associates, who specializes in tax planning for athletes.
Of course, there is nothing wrong with spending your new found wealth, but few people consider what they need to do to maintain their windfall over their lifetime before they spend it all up. Whether you have hit the lottery, inherited a fortune, or sued Bill Gates and won, here are eight tips you can use to make that money last.
Open an interest bearing checking or savings account. Every day you spend without cashing large checks you could be losing hundreds of dollars in interest.
Take a time out. The Sudden Money Institute says you should not spend any money until you clear your head, assess your financial situation, and commit to a financial plan that works for you. Decide what your immediate needs are, and pay off your creditors, especially those with interest rates higher than 10% to 15%.
Invest in Financial planning services: Don’t rely on friends or family to manage your money. Hire certified professionals to help you draft a will, purchase life insurance, or contribute to a retirement plan, says Piascik, who is a member of the NFL Players Association‘s Registered Financial Advisor program.
Contribute to an IRA, Roth IRA or retirement plan. By the time they have been retired for two years, 78% of former NFL players have gone bankrupt or are under financial stress because of joblessness or divorce, according to RAM Financial Group. Decide to monthly allocate a percentage of your windfall to a retirement plan.
Review the state of residency. Consider purchasing a home in a tax-advantaged state, like Florida or Texas, where you can save up to five percent or more in taxes, recommends Piascik.
Keep receipts from your spending. Save money on taxes by deducting charitable giving and on-the-road expenses, such as meals, hotels, laundry, and wireless minutes, says Piascik.
Beware of mortgage interest limitations. You will lose tax-deductible interest paid to home mortgages and equity lines that exceed $1,100,000. Work with a tax advisor to structure loans to maximize tax deductions.
Review allocation of state reported income. Athletes aren’t the only ones who have to report income made in several other states besides their state of residency. Have an experienced tax advisor review W-2s to ensure that you don’t pay more than you should.
For more information on how to manage money when you move up the tax bracket visit: