Navigating the complexities of a sudden wealth requires careful consideration beyond the initial excitement. The impact on personal relationships, the temptation towards excessive spending, and the risk of poor financial decisions highlight the importance of a measured approach. Seeking professional advice to assess one’s new financial situation is crucial in making informed decisions that secure long-term stability and prosperity. Read on to learn more about how to strike the delicate balance between enjoying newfound wealth and ensuring its sustainable management.
If a million dollars—or more—fell into your lap tomorrow, what would you do?
Sudden wealth isn’t an especially common way to get rich—nor is it the most reliable method. Most significant wealth results from considerable efforts made over a long period of time. But there are exceptions.
Indeed, significant wealth sometimes happens very fast—and may not even require breaking a sweat. Some big drivers of sudden wealth include:
- Receiving a substantial inheritance
- Getting a major settlement in a divorce or a lawsuit
- Hitting the big time as an entertainer or athlete
- Receiving a big payout because of stock options or the sale of your company
- Winning the lottery
Sounds great, right? But while sudden wealth may seem like a dream come true for many of us, it’s often accompanied by serious challenges resulting from the “sudden” aspect of that money. With sudden wealth, everything about being rich—the good and the bad—happens at once. In contrast, most people who build wealth slowly are able to address issues and concerns incrementally over time as they arise.
The result: Sudden wealth can be an overwhelming experience. Sometimes there are emotional challenges because of the source of the money—a relative who died, for example. Feelings of panic or guilt can go hand in hand with the feelings of excitement. All those swirling emotions can cause recipients of sudden wealth to make bad—sometimes exceptionally bad—decisions about the money and about their lives.
Here’s a look at how you—or someone you care about, such as your children or other relatives—can prepare to deal with sudden wealth effectively to realize amazing opportunities while avoiding the many pitfalls of “striking it rich.”
Relationship Challenges of Sudden Wealth
To be sure, getting rich quickly can solve many financial problems. You can pay off debts that have been weighing on you, improve your medical care and never again worry about affording the things you need. At the same time, getting rich quickly can create big problems in your relationships with other people—including the people in your life you care about most (see Exhibit 1).
- It is likely family and friends will knock on your door looking for funds—a sibling might be looking for an investor in her new business, or a distant relative might ask for help paying medical bills. A friend might hit you up for a loan. Expect these requests, as you’ll suddenly be seen as a financial “white knight.”
- Your marriage can be impacted, too, as shared decisions about how to spend/save/invest the new wealth can create friction. Before you got rich, your money was used largely to pay the bills. Now, with a lot more money, the myriad possibilities can create a wedge between spouses.
Sudden wealth can also impact new relationships. Are new friends—and, especially, new potential romantic partners—interested in you, or your money? If it’s well known that you’ve become wealthy, there is a high probability that strangers will approach you asking for money. Sometimes it will be for a very worthwhile cause—but it is quite possible it is just a scam.
Four Ways Sudden Wealth Can Be Ruined
What’s more, people who experience sudden wealth can fall into several traps that can quickly erode or eliminate those assets. These wealth destroyers can impact anyone, of course. But we see them hit the suddenly wealthy especially often.
1. Giving away too much money
If you give too much of your wealth away, you can end up in a precarious financial position faster than you might imagine. Even loaning money can prove problematic and occasionally disastrous. Most times, there are not any mechanisms (such as collateral) in place to ensure repayment.
2. Extravagant spending
When some people get a windfall, they spend wildly. There is nothing wrong with treating yourself well and enjoying a good life. But if the money needs to last a long time, excessive spending can jeopardize your financial future. The key is to balance needs and objectives with wants.
Action step: Create a wish list, and then prioritize the following:
- What are your necessities? How much will they cost?
- What are your “nice to haves”? How much will they cost?
- What are your “not that importants”? How much will they cost?
3. Poor investing and planning
If you receive a windfall, there will be a lot of professionals seeking to help you manage your money and address your planning needs (such as for an estate plan). That’s especially true if your sudden wealth has been made public, increasing your profile in your community. There is a high probability that many of these professionals are going to be “Pretenders” who aim to do a good job but are simply not talented enough to help you. Some may be “Predators” —actual criminals seeking to illegally separate you from your wealth. Then there are the “Exploiters” who want to take advantage of you using approaches that, while legal, are very risky or even dangerous.
You want to work with consummate professionals—experts who sincerely care about you. These professionals are recognized authorities. They understand the difficulties you face due to becoming suddenly wealthy and are able to help you chart a financial course that matches your needs and wants. Consummate professionals can also act as a sounding board when it comes to most aspects of dealing with your newfound wealth.
4. Lawsuits and divorce
Your sudden wealth can make you a target for unscrupulous litigants. One way to address this possibility is by safeguarding your assets. By working with a wealth manager who is well versed in asset protection planning, you can potentially insulate yourself from deceitful and ruthless litigants—legally.
As noted, sometimes sudden wealth leads to marital friction. When this becomes really bad, it can lead to divorce, which can significantly erode that windfall. If you become suddenly wealthy before you’re married, strategies like prenuptial agreements should be considered. If you are already married when you become suddenly wealthy, the actions available to you may be more limited.
Take responsibility
If you or a loved one is fortunate enough to become suddenly wealthy, here’s a process we recommend that can help you or the other person get prepared and set up for success (see Exhibit 2).
Step 1: Assess your situation.
Step 1: Assess your situation.You need a solid understanding of how much money there really is, and what you need and want to do with it. Often that requires slowing down and working through some of the emotions that accompany sudden wealth in order to think rationally about the windfall and its impact. A wish list, a balance sheet and a cash flow statement can all play a part in evaluating where you are and what you are considering. Detailed tax analysis and planning can also be important, as some windfalls may come with tax implications that need to be considered.
Important: Part of this assessment should be understanding your limitations. Where do you need help in dealing with the assets?
Step 2: Rely on consummate professionals.
In general, the more money you have, the more you need the services of top financial talent. Working with a consummate professional will probably help you avoid some monetary problems. You can also run ideas by consummate professionals to get their perspectives. Their extensive experience, expertise and ability to see your situation rationally rather than emotionally can be useful in helping you think through different matters and plans.
Step 3: Make reasoned decisions.
To make a windfall work best for you, you need to make intelligent and informed decisions, such as avoiding impulse buying that leads to buyer’s regret. Moreover, it is crucial to always recognize that you are in charge and to take responsibility.
Get Set Up
If you or someone you know is dealing with issues around sudden wealth, consider reaching out to us at Resolute Wealth Advisor, where we can schedule a one-on-one conversation to review the specific impact that your Sudden Wealth has made for your short-term and long-term financial planning and investment goals.
We welcome the opportunity to meet with you to learn more about your goals, interests, and caring for those who are closest to you. Below is information related to scheduling an Introductory Meeting with Scott Hohman or Beau Bryant to discuss your specific situation. During this 30-minute meeting, we will also present our Wealth Management Suite and provide you with an overview of our services and how we partner with our clients to create customized investment and financial plans that help guide you towards achieving your financial goals.
We look forward to our future conversations!
