What is a sudden wealth event? Although there are a variety of ways to come into money, sometimes cash windfalls arrive unexpectedly, and in large amounts. Certain sudden wealth events are more common than others, but all of them can take a turn for the worse if not handled properly. You may even develop what's known as Sudden Wealth Syndrome. So it's important to keep these strategies in mind if you suddenly find yourself with a cash or investment windfall.
Types of Sudden Wealth
- Winning the lottery (e.g. Powerball, Mega Millions)
- Selling (exiting) your business (Acquisition, Merger, IPO)
- Receiving an inheritance
- Divorce settlement
- Life insurance pay outs
- Settlement from a lawsuit
- Lump-sum distribution from a pension account (For more, see: Are Pension Buyout Offers A Good Deal?)
What Should You Do?
- First, define your hopes, dream, and goals. What is the single most important thing you want your money to do for you? This is, in my professional opinion, the most important thing you can do. Once you have defined and crystallized your objectives, it will be easier to plan for your sudden wealth.
- Know what you're getting and why you are getting it. Take the time to get familiar with how much money you should expect and how you will receive it (lump sum, payments over time, etc.)
- As early as you can, assemble a team of professionals. Don't rush into this–do your due diligence, schedule meetings and interview professionals like a Certified Financial Planner, CPA or tax professional, estate planning attorney, and an independent insurance professional. Also find someone to help guide you (a mentor, trusted friend, etc.), who can be a sounding board for you without needing to be compensated. Putting together your financial professional dream team is crucial to making sure you are able to manage your sudden wealth moving forward.
- Be wary of people asking for money, especially friends and family. You may want to consider not telling anyone you have received sudden wealth. Money changes people, and the people around them. (For more, see: How To Manage A Cash Windfall)
- Don't rush into any large purchases. Sleep on things for a bit. There's nothing wrong with going out to celebrate with loved ones, but keep any large purchases on the back burner until you have had time to put together sound strategies
Other Things to Consider
You should also think about how this sudden wealth fits into your overall asset allocation. When done properly, an investor’s allocation of assets will reflect their desired goals, priorities, investment preferences and tolerance for risk. Asset allocation is an individualized strategy, so there really is no perfect mix of assets. Each individual’s strategy is built on the careful consideration of the key elements of their financial profile. (For more, see: An Introduction to Asset Allocation)
- Investment Objectives: What do you hope to achieve using your investment dollars–improve current lifestyle; achieve capital growth; fund a specific goal such as a college education?
- Risk Tolerance: This reflects the your comfort level with market fluctuations that can result in losses. Inflation risk and interest risk need to be considered as well.
- Investment Preferences: You may prefer one asset class over another based on a certain bias or interest towards the characteristics of that class. (For related reading, see: Behavioral Finance: How Bias Can Hurt Investing)
- Time Horizon: The length of time you are willing to commit to achieving your objectives.
- Taxation: Investing in any mix of asset classes will have varying tax consequences.
So what do you do now? Nothing. Take a deep breath, gather your thoughts, and then start working through the list above. It's your money after all and there is no rush, even if others are telling you there is.