An inheritance, a big bonus, a surprise payout, or a windfall that you knew was coming – these financial events are very exciting and mostly positive. However, the stress of receiving a large sum of money can derail even the most prudent people – there is something about it that makes us think it’s going to last forever.
We have all heard the stories about entertainers, professional athletes or lottery winners who blow through vast amounts of money in short amounts of time.
This behavior is so typical that it has a name: Sudden Wealth Syndrome and it is many times accompanied by stress, guilt, social isolation, mistrust, and poor spending habits. The truth is that anyone who is fortunate enough to receive a windfall, whether it be $50,000, $500,000, one million or more, (it’s all relative) are at risk of mishandling their money and regretting financial decisions.
As a financial planner, I have seen people take the following actions after receiving a windfall:
- Quit their job before they have a new one lined up.
- Decide to do a major remodel on their home and not an appliance upgrade or fresh paint.
- Buy family members expensive gifts.
- Give money to family or friends who are in need.
- Buy costly cars (a Tesla instead of a Prius).
- Take luxurious vacations.
I have also witnessed the feelings of despair and guilt that inevitably arise after the euphoric phase is over and the money has dwindled. 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.
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 planner can help make sound investment decisions and create a plan for managing your good fortune and your future.
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 real value of an inheritance.
Most 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.
Sudden wealth creates opportunity
Sudden wealth creates opportunity – for security, for pleasure, for doing good – but without careful planning, it can create headaches (and heartaches too). With a financial plan in place, you can avoid the negatives (regret, remorse, guilt), and embrace the positive outcomes from a financial windfall.