The person who suddenly comes into wealth needs much more than financial planning. Lottery winners, those who inherit wealth, people who sell a family business often fall prey to the “sudden wealth syndrome” and frequently lose what they have gained. Sudden wealth recipients’ immediate concerns may have little to do with financial planning or investment strategies. Even people who know they’ll be getting money at some point—such as an inheritance—may significantly underestimate the amount. Failing to address the psychological ramifications of sudden wealth can lead to financial ruin. The assistance that these people need is often more psychological than financial, at least at the beginning .
Newfound wealth is usually a very emotional thing and people usually make terrible financial decisions when they are emotional. People who win the lottery or inherit wealth need to give a lot of thought and decide what they want their lives to look like. Some of the dangers that these people face include:
- Thinking they have more money than they do. No matter how much it seems at the beginning it’s always a finite amount and can run out if not properly handled.
- Windfalls are viewed very differently than money they that’s been worked for and therefore is often spent irrationally. No one really “needs” a yacht.
- Many immediately quit their jobs. The problem then becomes: what are they going to do with their time. This can lead to a “honeymoon period” where they go on spending sprees and find their lives empty of meaning.
- They become suspicious, including suspecting their advisors of being more interested in their money than them.
- They are barraged with business propositions, requests for loans and the like. This is where a trusted advisor can help. I recently had a portfolio review with one of my clients who is a doctor. Physicians and surgeons are constantly barraged with business and investment proposals because they are viewed as wealthy. I offered to review these proposals for him and tell him which ones were legitimate, reasonable and appropriate for him. An advisor should be willing and able to do the same thing for those who have acquired sudden wealth.
Advice to those who achieve sudden wealth. Don’t do anything sudden.