You hit the lottery. A relative bequeathed you a sizeable inheritance. That lawsuit resulted in a significant court judgment. The business you sold, the book you wrote, or the song you recorded made you a small fortune. Whatever the reason, you might find yourself the recipient of sudden wealth.
Yes, there is such a thing as sudden wealth, just as there is some truth to an overnight success. That million-to-one-shot does occasionally happen, and it may be possible to catch lightning in a bottle.
However, most people build their assets over time. Creating a significant nest egg typically relies on a slower and steadier pace. As such, those who become wealthy over time more easily adapt to their wealth.
Sudden wealth, just like the rags-to-riches story, is very often romanticized. It’s been the focus of television shows, books, and movies for, well, forever. Yet, it can often be accompanied by such emotions as shock, uncertainty, and anxiety. Friends and family may come out of the woodwork, either with their hand out or with “a great idea” that will supposedly increase your money. Thinking you have more money than they do, you can start making irrational and rash decisions – putting money into highly questionable investments, living extravagantly, being overly generous to others. You may quit your job or make expensive purchases. Short-term actions replace long-term goals.
While people in all walks of life can fall into this trap, the plight of professional athletes has been most closely studied for the adverse effects of sudden wealth. According to Sports Illustrated, 78 percent of NFL players file for bankruptcy two years after retirement; 60 percent of NBA players suffer the same fate five years after leaving the game.
There are many stories of lottery winners who strike it rich only to squander their money in no time. Many, as a result, end up feeling alienated from family and friends and hitting emotional lows. The only thing worse than not having any money is having it and watching it slip through your fingers.
So now what do you do?
Here is a list of things to prepare you for handling your sudden good luck:
- Take the time to process. Various emotions accompany sudden wealth. These include numbness, shock, fear, isolation, even guilt. Please don’t make any overnight decisions, whether telling your boss what you think of him or putting a bid on your dream house.
- Gather a team of experts. You can’t do this by yourself. Talk to professionals (such as a financial advisor, accountant, and attorney) who can give you the expert advice you need. Having a financial plan can help ensure your new wealth is protected and directed toward helping you meet your goals.
- Keep the news quiet. To some people, bragging about their wealth is a big part of the benefit of having it. All that does is attract hangers-on.
- Be aware of the liabilities. Many people think only of the money coming in, not the taxes coming out. Knowing your tax liabilities will give you a realistic look at how much you have to spend, invest and live off.
- Create a list of long and short-term goals. Have plans in place regarding how you plan to maximize your money right away and over the long haul.
- Manage your emotions. This is particularly important if you come into a significant amount of wealth unexpectedly. Learn to manage a roller coast of feelings.
- Develop a protection plan to protect your assets. The goal is to develop a way to keep the money protected and growing over many years.
The feeling of new wealth can be an elixir, a high point in one’s life, a dream come true. However, when combined with poor decisions and the lack of planning, it can lead to lost opportunity.