An inheritance, a lottery win, a surprise payout — lucky you, a financial windfall!
And yet, a quick Google search for “statistics on how people handle sudden wealth” tells a more complicated story. Results include:
- 1 in 3 Americans who get an inheritance blow it
- 70% of rich families lose their inheritance by the second generation
Stories about entertainers, professional athletes or lottery winners who blow through huge amounts of money in short amounts of time are common.
Many of us in the financial planning industry call this Sudden Wealth Syndrome – a very real experience surrounding new or sudden wealth. The truth is that anyone who is fortunate enough to receive a windfall, whether it be $50,000, $500,000, one million or more, are at risk of mishandling their money and regretting financial decisions.
SWC is a wake up call – and an opportunity.
The first piece of advice after that windfall arrives? Wait.
Take a deep breath.
Don’t do anything with the money for at least six months – and during that time, assemble your team: a financial planner, an attorney, a CPA. Different scenarios will require different support, but use professionals to help plan your desired outcome.
One of the biggest mistakes I see people make is to receive an inheritance and immediately quit their job, often underestimating how much money they will need to replace their income.
Of course, the withdrawals from the inheritance would begin immediately, and even those who plan a short career break to regroup might find it a bigger financial drain than they imagined. (The other issue is with more free time, there is more opportunity to spend money!)
Another common misstep is to commit to large expenses that would not have been considered before the sudden wealth arrived: an extensive home remodel, rather than appliance upgrade and fresh paint; a new Tesla instead of a Prius; a down payment on a beach house instead of a beach vacation.
Quick tip on how to avoid this disaster: Make a spending ‘dream’ list… and then pare it down to realistic priorities before you write the checks.
Overwhelmed and overspend go hand in hand, and these reactions to unearned money are common, and very human – as is the regret experienced after the money is almost gone.
Is it possible to not get caught in the sudden wealth trap? Yes, but it will take discipline.
Here are a few ideas:
1. Seek professional advice.
A qualified financial advisor is experienced with inherited wealth, and can help make sound investment decisions and create a plan for managing your good fortune. (Be sure to schedule follow up appointments to stay accountable to your goals.)
2. Don’t quit your day job!
Wait until you have a solid understanding of how much inheritance you are willing to spend to replace your salary.
3. Transfer the money out of your checking account as soon as possible.
For example, a brokerage account or CD’s (preferably an account without check-writing privileges!) This move can delay access and perhaps abort a big splurge you might regret later.
4. Understand the true value of an inheritance.
The majority of inherited money and property is not taxable to the recipient. When you consider how much of your income is taxed, you realize what a gift that is.
5. Create mindfulness around the money.
Think deeply about what you want to do with it to match your values, and make decisions with clarity to use the windfall wisely and well. Talk to your trusted circle – a friend or family member, a therapist or advisor – before making any large purchases or life changing decisions.
Mo’ Money, Mo’ Problems
Sudden wealth creates opportunity – for security, for pleasure, for doing good – but like the song says, sometimes Mo’ Money equals Mo’ Problems. With a financial plan in place you can avoid the negatives (regret, remorse, guilt), and embrace the positive outcomes from a financial windfall.
Sudden wealth or not, you need a better way to manage your money. Here’s a tool to make it easier.
If you want to think differently about the relationship between your spending, your values and your happiness, then sign up to get your FREE copy of The Happiness Spreadsheet.
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