The Dos and Don’ts of Sudden Wealth
What is Sudden Wealth?
“Sudden wealth” refers to the experience of coming into a large sum of money suddenly and all at once. Sudden wealth isn’t based on a particular income bracket or dollar amount. Rather, it is any amount of money that is significantly more than you are accustomed to managing—enough to take you out of your financial comfort zone.
Whether from an inheritance, the sale of a business, or a lottery win, suddenly having access to money you weren’t expecting can be nothing short of life-changing.
The positive aspects of sudden wealth scarcely need to be stated. Financial security, the ability to help those less fortunate, and the chance to pursue a long-delayed dream are just a few of the many potential advantages of new money. But unfortunately, sudden wealth can become a very real problem if you aren’t prepared to manage it properly. In this article, we will walk you through what actions to take—and what hazards to avoid—if you find yourself on the receiving end of an unexpected windfall.
How to Manage Sudden Wealth: 8 Dos and Don’ts
We’ve all heard the stories of big-payout lottery winners who went broke in a matter of years or professional athletes who had to declare bankruptcy despite lucrative contracts. These are cautionary tales of people who experienced sudden wealth but were not equipped with the right tools and information to manage it wisely. Fortunately, you can avoid these pitfalls if you’re financially and emotionally set up to handle the change. Let’s take a look at the top dos and don’ts of sudden wealth management.
1. Do get to know your sudden wealth.
When you first acquire your sudden wealth, spend as much time as you need taking stock of your situation. Sudden money often comes with lots of paperwork, and it’s in your best interest to read every line in every document. If you encounter legal terms and concepts you are unfamiliar with, look them up online (Investopedia is a great resource) or consult an expert. Talk to friends who have also experienced sudden wealth events, or peers in the financial industry. In short, give yourself a crash course on personal finance and learn all you can about the money you’ve acquired.
2. Don’t make hasty decisions.
When you suddenly come into a large sum of money, you may think you need to react right away. You do not. In fact, you should not. The best course of action is to take some time to let it all sink in. Regardless of how you acquired your money, you will probably be dealing with a slew of conflicting emotions in the immediate aftermath. Take a deep breath and wait a few months to get accustomed to the idea.
3. Don’t make a lot of large purchases up front.
This is not to say that you shouldn’t enjoy your influx of money. Rather, it’s important to take care of business first, making sure you understand precisely how much you have and all the tax and legal implications of your newfound wealth. As much as it may seem so at the outset, your money isn’t limitless. Your most important job now is to figure out how to manage and invest your money so it will work for you instead of against you.
4. Do assemble a wealth management team.
When you are ready, start assembling your team of experts. This step is arguably the most important “do,” as these are the financial services professionals who will help you make the right financial decisions and manage the complex financial, tax, and legal issues that arise. Your team should include, at minimum, a Certified Public Accountant (CPA), estate attorney, and financial adviser.
The comprehensive financial team you assemble should consist of people you’ve carefully vetted to ensure you get the best financial advice. If you already have a CPA, that person may be able to connect you with other reputable financial planning professionals. If not, you may once again want to tap into your network of friends, family, and colleagues for referrals. Your goal is to find objective experts who have proven through their involvement with your network of friends and colleagues that they put the interests of their clients first and foremost.
5. Do develop a wish list for your money.
Make a wish list that includes both “must-dos” and “nice-to-haves.” Must-dos include setting aside money for taxes (you may owe taxes on your windfall!), paying down debt, saving for retirement, estate planning, and paying for a child’s education. Nice-to-haves include non-necessities like a big vacation, large gifts, or even eventually quitting your job. Always prioritize your “must-dos” over your “nice-to-haves.” It may sound obvious, but the emotional whirl of new wealth can throw you off balance, driving you to make out-of-character decisions. Your wish list is there to keep you honest.
6. Do create a long-term plan.
Once you’ve assembled your wealth management team and separated out your financial needs and wants, it’s time to put a solid plan in place. Work with your team to determine how much you can safely withdraw annually if any, how much you want to invest (and your risk tolerance), and how much you want to set aside for retirement. Other things you might consider include how much you want to leave to your heirs, charities, etc. The details of your plan will depend entirely on your unique situation, so again, make sure to carefully research your options and get advice from your team before making any major commitments with your money.
7. Don’t fall prey to schemes and fair-weather friends.
It’s a sad fact of sudden wealth that opportunists and others looking to take advantage of your good fortune will suddenly come knocking on your door once the word is out. Of course, it’s fine and even laudable to help out friends and family members who are truly in need. Just be wary of who is asking for money and why. Your sibling asking for help in paying for a necessary medical procedure is one thing; a long-lost high school buddy asking you to invest in his latest get-rich-quick scheme is another. Remember, you have the right to decide what to do with your wealth.
8. Do be aware of “sudden wealth syndrome.”
Sudden wealth syndrome refers to the psychological and emotional issues that sometimes befall those who acquire a large amount of money. Despite new wealth seeming like a wholly positive experience to outsiders, it can take a toll if you let it overtake you. You may find yourself feeling isolated from envious peers, paralyzed by indecision, or wracked with guilt over receiving money you don’t feel you deserve. For many, a sudden wealth event can trigger all sorts of negative experiences and emotions that ultimately lead to poor choices and self-destructive behaviors.
However, sudden wealth can also serve as a wake-up call—even an opportunity. It’s a chance to reconsider and rebalance relationships, long-term goals, and financial life. Rather than spending new money frivolously, many learn to reexamine their values and reconsider what is truly important.
There’s no question that a sudden wealth event will change your life. But if you equip yourself with an experienced, objective team of professionals—and prepare yourself for the financial, social, and emotional road ahead—you will be well-positioned to use your money to make a difference, not only for yourself, but for your family, community, and future generations.