Here’s what to do if you ever find yourself in a position of sudden wealth.
Research in the fields of neuroscience, psychology and sociology found that receiving even three months’ salary in the form of a lump sum could be enough to cause an emotional chain reaction in most people. In fact, sudden wealth is proven to bring emotional baggage and confusion into a person’s life, along with new financial opportunity.
“We work with a lot of people in the music business and professional athletes where wealth can come on suddenly. This is an exciting time of course, but we have to beware making decisions too quickly and out of emotion. There are so many feelings surrounding new money, and that is where our team helps provide a sound foundation to make the best long term decisions while still honoring the needs and goals of the client.”
That’s why we believe it’s important to understand the psychology of sudden wealth — and have a plan in place to proactively take steps to manage the financial and personal burden of such an experience. Here are 5 steps to financially and emotionally prepare yourself before you spend the first penny, in the case of sudden wealth.
5 Steps To Spending Sudden Wealth
- Decide what’s important to you.
The first thing you want to do when receiving sudden wealth is seriously consider what’s important to you. First, think big picture. Will this money be life-changing? How do you hope it will change your life? Who will you share it with, if anyone?
Next, start to envision some of the details. We recommend focusing first on any immediate financial needs you have been delaying because of a lack of resources. These basic needs could include debt or a mortgage repayment. Make a list of these basic needs — that’s where you’ll be spending your newfound wealth first.
- Assemble your team of advisors.
Now that you’ve figured out your basic needs, it’s time to assemble your team of advisors. Especially if this is a life-changing amount of wealth, you’ll want the right team of professionals to guide you through this next phase — without making costly mistakes or succumbing to common emotional pitfalls. These professionals may include a: Certified Financial Planner®, tax preparer/accountant, estate attorney, insurance broker, and more. The important thing to remember here is you’re not alone in this process, and you don’t have to act alone.
- Create a wealth management plan.
Once you’ve decided what’s important to you and hired your team, it’s time to create a comprehensive wealth management plan. While this plan should include all professionals, we suggest having a Certified Financial Planner™ professional act as the quarterback of your wealth management plan, ensuring everyone works together to help you win the long game.
You’ll likely have a couple major decisions to consider upfront. If you have control over when and how you’ll receive your windfall, for example, this is the time to make that decision. You’ll also want to decide whether you’re going to spend the principal or the earnings. Determine a plan that will work for you, so you don’t make an emotional decision you’ll regret later.
Next you’ll need to address tax concerns and determine the best strategies to help you mitigate potential consequences. Ideally, you want your certified financial planner and accountant to work together, to make sure your tax planning and preparing needs are being fully met.
- Solidify your plans.
Now that you have a plan in place, and your team of professionals is actively guiding you, it’s time to take a pause. Sleep on it. Take time to just relax and reflect. Then revisit your plan and see what comes up. Is it in line with the life you want?
Now that everything has been sorted, it’s time to firm up your mindset. How do you view this sudden injection of wealth? Is it truly a life-changing amount of money? You may be able to suddenly quit your job and focus on a passion project, living a completely different lifestyle than before. Or you might continue living a similar lifestyle, with more security and confidence in your financial foundation.
- Spend wisely.
You’ve reached the final and most rewarding step of receiving and securing sudden wealth. Before you go wild, decide how much money you can stand to burn. Don’t derail your plans now with a no-limits spending spree. You can, however, probably afford somewhat of spending spree. So set a limit, and have a little fun and always remember to choose experiences of things.
Bonus: Make a difference.
Sudden wealth can change a lot, and even create a brief period of confusion. It’s also an opportunity, however, to rebalance your time and energy — and maybe even invest in your passions and community. Consider your legacy, and begin making plans to support it over time. You don’t need to go out and start a charity, but you may want to start including some charitable donations in your financial plan for the future. After all, if you’ve followed these steps, you’re likely in the best financial position of your life.
Warning: Anticipate unwanted attention.
Make it a policy to keep your newfound wealth quiet, at least while you determine who you can trust. You may find yourself suddenly involved with a new social circle. Take time to decide who you can trust before you divulge information about your financial situation to others.
If you’ve received or are expecting sudden wealth, start the conversation today. To set up a consultation with one of our financial advisors, please call David Adams 615-435-3644
The foregoing information has been obtained from sources considered to be reliable, but we do not guarantee that it is accurate or complete. Any opinions are those of David Adams Wealth Group are not necessarily those of Raymond James. Raymond James does not provide tax services. Please discuss these matters with the appropriate professional.