Managing Sudden Wealth

More money, more problems.  Originally said in verse, the phrase can hit a nerve for the countless lottery winners, celebrities, and sports figures who once had millions yet now struggle to make rent.  It seems like an impossible mistake to make, yet each year new stories emerge of people who went from having it all to filing for bankruptcy.  For those away from the public eye, an inheritance or large bonus can lead to similar ruinous results.  A substantial sum of money is supposed to bring happiness - and absolutely can - so why do so many lottery winners come to regret claiming their prizes?  The reasons for losing fortunes vary but the losses tend to follow a simple trend: poor money management.

Sudden Wealth Syndrome

If you've received, or expect to receive, a large sum of money you might feel a little stressed out.  That's perfectly normal.  There's even a medical term for it: Sudden Wealth Syndrome.  It's very real, and it affects people regardless of income bracket.  Our income and wealth have a significant impact on our sense of being.  A sudden windfall (such as an inheritance) can have an adverse effect on self-esteem.  Research has shown a connection between significant increases in wealth and stress-related symptoms.

• Inheriting, winning, or earning a large sum of money can often create feelings of guilt. Perceived or actual envy from friends and family can lead some to crave isolation and conceal their newfound wealth.
• A large amount, even when expected, has the potential to be overwhelming. Like going to a restaurant with too many options on the menu, a windfall amount can create too many financial options to choose from.
• When something feels too good to be true, it can be hard believing it won't disappear. This can lead to something called "ticker shock" - a term describing an obsession with the stock market.

Ironically, obsession over losing a fortune by no means offers prevention from actual loss and may actually contribute to it.  Preserving sudden wealth takes deliberate intent and the help of a personal financial professional.  

The Importance of Creating a Plan

If the money has already hit, or you're expecting it soon, creating a plan as soon as possible can help increase your odds for success.  A lot of money can feel like an endless supply of cash at first, contributing to irresponsible or overly-generous behavior.  Gifting family members, friends, and charities large amounts can feel very rewarding but may come at the cost of your own well-being.  A little gift here and a small loan there can quickly total up to major losses.  Before spending your sudden wealth - even ‘just a little’ - create a plan for managing it.

1. Take Inventory

Wealth comes in different forms.  Lottery winnings may come in lump sums or monthly installments.  An inheritance may include an IRA, real-estate, securities and more.  These assets can lead to increased tax obligations and may require enhanced oversight.  In some cases, wealth may be dependent on market events or age requirements.  Taxes often prove another challenge, as new and unfamiliar taxes can lead to confusion following sudden wealth.  Understanding how much wealth there is, how long it's expected to last, and how best to preserve it can place you in a stronger position for getting started.

1. Set Goals

If your first impulse is to buy a new car, try and resist.  While a new vehicle is certainly something you can achieve, spending newfound wealth on depreciating assets is largely inadvisable.  Similarly, basing goals off of your neighbor’s outward appearance of wealth or other people's perceived successes can lead to ruin.  Focus on your family and the goals important to you.  Keeping up with others will seldom include competitive asset building.  More likely, this kind of behavior will lead to squandered savings.  Developing realistic goals based on your dreams and those of your family can help illuminate appropriate strategies for managing sudden wealth and helping it last.

• Achieving the lifestyle you want to live
• Giving your family opportunities they deserve
• Gifting to the organizations you support
• Establishing a legacy you can be proud of

1. Draft Strategies

With the help of a personal financial advisor, you can create realistic strategies for pursuing your goals.  For many, quitting their job lands somewhere near the top of the list but beware: sudden wealth has a habit of evaporating if stretched too far.  Sudden wealth can be easily spent without responsible oversight.  Before long, amounts which once seemed endless can dwindle down to nothing, replacing what was once good fortune with debt collections, tax notices, and mountains of regret.  Developing a plan based on pursuing your goals with the resources available can help you take the best advantage of a cash windfall.