Maturity and 4 Considerations When Planning for Financial Lump Sums

Maturity and 4 Considerations When Planning for Financial Lump Sums

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As my daughter prepares to begin her first year of college, she is faced with the question of whether to accept student loans. My first question to her: “Is there anything you need to support your success?” My second question: “Do you have any other way to get money that offers comparable opportunity costs?” She decided to accept the maximum allowable financial aid loan package even though she only has a $1,200 or so shortfall on paper.

This post is about what she may do with that cash flow increase and how her thought process may be a lesson for you. You may only receive lump sums once per year in the form of a tax refund. Or, you may be one of the lucky employees that receives a yearly bonus, profit-sharing, escrow refund, or reimbursement. In either of these cases, you will benefit from an approach to lump sums that is carefully considered prior to the arrival of the cash.

Job One

Refuse the inclination to create a spending plan. Most people approach money the same way they did when they were 7 years old. “If I had money, I would buy…” Adulthood has some harsh truths for you to come to grips with. Among them is the truth that money has more utility than simply being spent. In fact, money management expertise can get you products, services, and experiences leveraging an amount of principle yet never depleting said principle. We can cover that in another post. Suffice it to say that your view of money needs to mature along with your age. When expecting large sums of money, larger than a rent or mortgage payment for example, expand your plan to fund long-term vision, respond to deadlines, prepare a timeline for your success, and implement to maintain gains.

Investment (Vision)

The first thought should be about utilizing the money to make more money. If the saying is true that takes money to make money, don’t look over those moments when you have money. A solid investment strategy will always look for your comfortable balance between value and return. Value is whatever you get in exchange for your money. Return is any financial growth your money leverages. As you mature in your financial mindset, your balance will lean more heavily toward return than value as you realize that you don’t need more things. Your financial nirvana is characterized by a perfect balance between return and value (Envision purchasing companies).

Budget (Deadlines)

Until your nirvana, there are bills to pay and deadlines to meet. A 12-month budget plan, you can keep track of what is coming in and what is going out. You know what the predictions are for lean months. A lump sum can help you manage the budget and pad the lean months so that they are not stressful. You accomplish this by holding back a portion of the lump sum in savings or quickly liquid investment until it is needed. This is different than hoarding money or “trying not to spend” a practice that I speak at length against. This is planned application of money as a patch for financial holes.

Plan (Time Line)

Freedom from the stress of bills unpaid can increase your ability to plan for your financial future. Rather than scraping together what you need when you need it, use the lump sum to earmark money for specific purposes over time. I enjoy presenting to clients that financial discipline does not mean foregoing everything that you enjoy. Money is a means toward enjoyable ends as well. The lesson is to plan for these, and know that you have the money to enjoy them without regret. The discipline is to refrain from those splurges that are not planned and integrated into the budget. Consider how the lump sum can free up money that can be saved monthly toward a travel, large purchase, or other goal.

Execution (Maintenance)

Once you have investment, budget, and planning, the task is to execute. Execution is difficult for some because it is an on-going activity. Your financial advisor is no longer in front of you telling you what to do. Even my clients that are on weekly check-in requirement have ample time during the week to go off the rails of their financial discipline train.

Like anything else that only pays off after extended periods of discipline, the challenge is temptation. Beware of the temptation to deviate from the plan. Temptation will come in many forms. Each has a challenge unique to your needs, weaknesses, and proclivities. My favorite is the temptation of family. My grandmother used to ask, “Aren’t you worth it?” Yes, I am, Grandma. But, it is not in the budget.  Another temptation are friends. “Let’s go out and blow off some steam.” Yes, social time can be fun. Let’s do something that doesn’t cost money. I need to blow off steam, but I don’t need to blow my money. A final temptation is You. “If I spend this now, I can make it up next month.” We can convince ourselves of anything. Learn to tell yourself “No” and mean it. Remind yourself that if you resist temptation and maintain your discipline, you will have everything your heart desires and sooner than you thought possible. No matter the “great deal,” the “grand opportunity,” the “must get now” that comes up. Stick to the plan. You will not regret it.