By James Ahn, CFP®, AIF®, Senior Wealth Advisor
What is Sudden Wealth Syndrome?
A dramatic increase in wealth can feel like a dream come true. But the effects of sudden wealth may also bring stress and anxiety, and even lead to an identity crisis. This is what is known as Sudden Wealth Syndrome, which is typically associated with lottery winnings, a large inheritance, or even overnight fame.
Money and finances tend to be a very emotional subject. When you experience a sudden, significant change to your finances, it can be difficult to navigate. If this has happened to you, it is important to understand with the right approach and proper planning, it is possible to manage –and potentially mitigate – Sudden Wealth Syndrome.
How to deal with sudden wealth
How should you manage sudden wealth? Strategies to manage your sudden wealth depend on your unique life circumstances as well as the amount you’ve received. Very simply, you have a few options: You can save, spend, or invest. In most circumstances, the right approach is all of the above.
Don’t rush into any big decisions
The first step? Take a deep breath. . Be selective about who you tell about this. Receiving a large sum of wealth at once could lead to irrational decision making and may attract a lot of attention. Advertising your newfound wealth on social media and bragging about it to friends and acquaintances could result in a lot of people being envious, or worse yet, lead to resentment and jealousy. Tempting as it may be to tell everyone about your windfall, it is best to only share it with those closest to you
Take the time to think through how you might use this sudden wealth to help your financial stability and ability to reach your dreams.
Consult with tax, financial, and legal professionals
Speak with your tax, financial, and legal advisors regarding your sudden wealth. If the windfall has a significant impact on your net worth, you’ll want to determine whether the proceeds are taxable. If taxes are involved, make sure to set aside enough money to cover them or pay them now.
Talking to your financial advisor about your sudden wealth can help you think through the decision-making process. Using the money only towards improving your lifestyle, for example, could be financially disadvantageous. Depending on the type(s) of debt you may have, paying them off all at once may not be in your best interest either. Take a long-term perspective: You can only spend the money once. This can help you to make better decisions when you’re ready.
Your financial advisor can also help you make smart investment decisions and put you on a sustainable path of spending. Your legal advisor can help create or update the appropriate legal structures to safeguard your assets. If you find that you now have responsibility for another person in conjunction with the wealth, you’ll need to plan for those responsibilities, especially with regard to minor children or people with special needs.
Update your financial plan
Whatever you’re considering – whether paying down debts, making new investments, making charitable gifts, and/or buying a business – you should update your financial plan before making any big decisions. When determining how to move forward with your newfound wealth, consider where you want to be financially and how you were previously tracking toward your goals.
Your sudden wealth may cause you to contemplate new goals that were not on your horizon before or appeared out of reach. Why not take the time to imagine and deeply consider how this wealth may serve to reshape your future? For many, this may be a once in a lifetime opportunity to make a life change they’ve been dreaming about.
Take the time to contemplate the what ifs. Picture the life you’d like to create for yourself over the next decade and more. Then go back to your financial plan to determine whether it’s feasible.
Consider therapy if necessary
Mental health issues can be stigmatized. We all process emotions differently and sudden wealth can lead to emotional turmoil for some people. Substance abuse is also highly common for those dealing with Sudden Wealth Syndrome. Coming into a large sum of money overnight can trigger a vast amount of feel-good chemicals in our brains, which can set the stage for addictive behaviors.
To combat the negative impacts of sudden wealth, it’s critical to stay aware of your thoughts and feelings. Don’t hesitate to work with a mental health professional to talk through any serious concerns. Regardless, it’s good to have stress management disciplines in place to deal with the emotional highs and lows.
Have fun, splurge a little, but stay within your plan
Finally, don’t forget to enjoy your newfound wealth. It’s okay to set aside some of the wealth for fun money and maybe allow yourself a percentage purely for your entertainment. In general terms, this should probably be no more than 5-10% of the proceeds. It’s helpful to track the spending, stopping once you reach your predetermined limit: It’s all part of your plan. The rest of the money should be dedicated to investing in your future and the legacy you envision.
Take the time to fully explore – and protect – your aspirations
Dealing with sudden wealth takes careful planning in the long run to understand your limits and keep from overspending. Continue to explore your values and passions as well as your responsibilities and concerns for others. This is an important investment of time. Knowing your priorities and commitments, and planning for what truly matters to you, will help enable you to spend and invest that windfall wisely. If you are in need of a sudden wealth financial advisor, reach out to Halbert Hargrove’s experienced team.
Disclosure:
Halbert Hargrove Global Advisors, LLC (“HH”) is an SEC registered investment adviser located in Long Beach, California. Registration does not imply a certain level of skill or training. Additional information about HH, including our registration status, fees, and services can be found at www.halberthargrove.com. This blog is provided for informational purposes only and should not be construed as personalized investment advice. It should not be construed as a solicitation to offer personal securities transactions or provide personalized investment advice. The information provided does not constitute any legal, tax or accounting advice. We recommend that you seek the advice of a qualified attorney and accountant. All opinions or views reflect the judgment of the author as of the publication date and are subject to change without notice. All information presented herein is considered to be accurate at the time of writing, but no warranty of accuracy is given and no liability in respect of any error or omission is accepted.
