Sudden wealth can be a wonderful opportunity to create a better life for yourself and others. Many sudden wealth recipients manage this process deftly and with few issues. It’s critically important to stay on track and to adjust your plan when necessary. It’s also important to stay away from these six common sudden wealth sins, which have led to many bankruptcies.
1. Spend Too Much
It may be incomprehensible for someone who was making $50,000 a year to go broke after receiving a $10 million windfall, but it happens. It might not disappear in a year or two but if the person is consistently making bad financial decisions, they can go through the money in less than a decade and much quicker if they also engage in one of the other sudden wealth sins below. (For more from this author, see: Lottery Winnings: Take the Lump Sum or Annuity?)
How can you avoid this fate? Go slow, work with experts, figure out how much you can spend, and then stay on track. If you still have problems, work with a therapist or money psychologist. The few hundred you spend learning about your triggers and underlying issues will be one of the best investments you could make.
2. Give Too Much
Sudden wealth recipients who spend too much on themselves will often give too much as well. When confronted with giving too much to family, one client confessed, “I feel guilty having this new house and stuff when the rest of my family is still struggling. I can’t enjoy what I have unless I give them what I have.” There are often familial pressures and hidden expectations to take care of the family that can weigh on the person. Helping those in need and others to create a better life for themselves can be one of the most rewarding uses of your windfall, but there is a limit to what you can do.
Stick to a spending plan, help the right way, and stay on track with monthly reports. Work with your advisors to create a long-term and sustainable plan to assist your family. Have your advisors become involved in the discussions with your family, if necessary.
Divorce can wipe out 50% or more of your wealth overnight. Divorce is also one of the most common reasons why sudden wealth recipients lose their money. Protect yourself with co-habitation, prenuptial, and postnuptial agreements. Work with a family law attorney to ensure you have some protection against separation or divorce. (For more from this author, see: Inheritance Planning: How to Avoid Family Problems.)
4. Invest Badly
A common and large source of loss for sudden wealth recipients is making bad investment decisions. Many smart people have made bad decisions and have invested too much of their sudden wealth in red investments. Avoid these and stick to mostly green and occasionally some yellow investments. Work closely with your advisors to review each investment – especially those that are yellow or red.
The Bernie Madoff Ponzi scheme proved that you cannot trust anyone. Madoff was a highly respected investor and was once chairman of the Nasdaq stock market. The onus is on you to create a system of checks and balances to protect your money. Follow the guidelines in Sudden Wealth Principle 10 as a starting point. Also, never invest in a company or venture your advisor recommends in which he is also involved.
In an instant, all of your assets could be in jeopardy if they are not protected. Lawsuits are all too common, especially for people who have wealth. Your sudden wealth makes you a larger and more visible target. Work with an asset protection attorney to shield your assets from creditors and lawsuits.
Stay on track with your financial plan so you too can make minor adjustments and so you and your future generations can enjoy your sudden wealth. (For related reading, see: Five Tax Strategies for a Bonus or Windfall.)
This article is adapted from the book, "The Sudden Wealth Solution: 12 Principles to Transform Sudden Wealth Into Lasting Wealth."
Investment advisory services are offered by Financial Management Network, Inc.(“FMN”) and Pacifica Wealth Advisors, Inc. (“PWA”). Securities offered through FMN Capital Corporation, (“FMNCC”), member FINRA & SIPC. FMN Capital Corporation is affiliated with Financial Management Network, Inc. Securities are not FDIC-Insured, are not bank-guaranteed, may lose value. Information herein is taken from sources deemed reliable and neither FMN, PWA, nor FMNCC are responsible for any errors that might occur. Neither Asset Allocation nor Diversification guarantee a profit or protect against a loss in a declining market. They are methods used to help manage investment risk. FMN, PWA, and FMN Capital Corp. do not offer legal or tax advice. Please consult the appropriate professional regarding your individual circumstance.