It can happen all of a sudden. Money that may or may not be expected comes to you overnight. But just what is sudden wealth? There’s gradual money and there’s money that comes suddenly. Most of us are used to gradual money—earning an income and building a nest egg over time. It’s a slow and steady process. As our net worth increases over the years, we adapt and slowly become more financially sophisticated. We may first hire a CPA to do our taxes when the deductions get too complex, then hire an investment advisor to manage our growing wealth, and then hire an attorney to help us create an estate plan. It’s like riding a smooth elevator—you’re going up, but you hardly feel it.
Then there’s money that comes sudden. It’s like being on the ground floor of a 60-story building and rocketing to the penthouse suite in seconds. It sounds a lot more exciting than gradual money, but what exactly is it?
Sudden wealth — or money that comes suddenly — means getting more money than you’re used to being responsible for—and getting it all at once. There’s no minimum dollar amount to qualify as sudden wealth. The distinguishing factor is that the amount has to be large enough to take you out of your financial comfort zone.
If you’re struggling to get by and suddenly get a check for $10,000, this might push you outside of your financial comfort zone. On the other hand, if you’re a multi-millionaire and inherit $100,000, you might not miss a beat. Again, the amount isn’t important; it’s your reaction to the amount that determines if it is sudden wealth.
Where does sudden wealth come from? It may have resulted from luck or hard work. It may have been years in the making or it may have happened in an instant. It may have been the result of a long and bitter battle or of simply being at the right place at the right time. It may have come from a painful end or a happy beginning. Typically, money that comes suddenly originates from a lawsuit, divorce, sale of a business, inheritance, lottery winnings, sport/entertainment contracts, retirement packages, or stock options.
Regardless of where the money comes from, you’re the same person you were the day before you received it, but you are quickly thrust into a new and often uncomfortable situation. While sudden wealth sounds like a great thing, it can cause anxiety, indecision, and fear in those who don’t adapt or develop a strategy.
Have you heard of the woman from New Jersey who won two lotteries totaling $5.4 million? She spent it all and now lives in a trailer. What about the entrepreneur who earned $24 million overnight from a successful IPO? Within a few months, he lost it all. What about the man who won $16.2 million? Less than a year later, he was $1 million in debt and now lives on Social Security.
Unfortunately, there are a lot more stories just like this. In fact, according to an MSN article, “as many as 70% of those who come into sudden wealth end up losing it all because of their inability to deal with the practical, financial and emotional issues involved.”
If you’re the recipient of money that came suddenly, follow these six steps to ensure you don’t end up another sad statistic:
Step 1 – Build your sudden wealth financial team
While you may be in unchartered waters, you’ll want to create a financial team composed of people who live and breathe in these waters. They can help you navigate the numerous tax, financial, and legal issues that arise. This is the first step because there may be time-sensitive opportunities to deal with immediately that can help you save or defer taxes.
Who should be on your team?
At a minimum, you’ll want a CPA, an estate attorney, and a financial advisor. You should also consider a money psychologist, and if your windfall is highly publicized, a publicist to handle the media on your behalf or to give you the tools to communicate effectively with the media yourself. Note: If your sudden wealth is the result of a lawsuit judgment/settlement, talk to your attorney before you talk to the media or hire a publicist. He/She may have other pending cases that could be affected by what you say.
Your windfall financial team needs to have only your interests in mind. Sudden wealth can cause feelings of fear and paranoia. The last thing you need is to wonder if the advice you’re receiving is in your best interest or in the best interests of your advisors. Only hire a CPA and an attorney who charge by the hour. Don’t work with an investment advisor that sells their own products, charges commissions, or receives referral fees. Your advisors’ compensation shouldn’t be tied to the advice they give you.
Where do you find your team?
If you already have a CPA or attorney, ask them for help. If your windfall is substantial, chances are good that you’ve outgrown your current advisors. Your team needs to have the skills and experience helping clients with similar assets and under similar circumstances. Be honest with them. Tell them you’re building your team and you need referrals.
Once you get referrals, interview them. Ask them about their experience, training, and how they’d work with you. Question how they charge and if they receive compensation from any source other than their clients. Again, you want to make sure they are objective.
Step 2 – Calculate your “end of the day” number
Not all sudden wealth is created equally. A check for $20 million may actually be worth less than a check for $10 million. How? Taxes. If you receive an inheritance, you won’t have to pay any tax on it. If you win a judgment, part of it might be tax-free, but chances are that you’ll have to pay tax on the rest.
When it comes to taxes, the last thing you want is a surprise. Each sudden wealth event has different tax ramifications. It’s important to know how much tax you’re going to have to pay so you can plan for it. Work with your CPA to find out exactly how much tax you owe. Once you know the amount, take this money, put it in a separate account, and don’t touch it.
Also, what are your other liabilities? Do you have a large mortgage? Unpaid credit card debt? Other outstanding loans? How much are all of your liabilities combined?
End of the Day Number
(Sudden Wealth + Previous Savings) – (Taxes Due + Total Debt)
Your end of day number tells you how much you have to spend, invest, and live off. It’s a critical number. Don’t buy anything, invest, or make any money decisions until you know this number.
Step 3 – Create a sudden wealth wish list
The first two steps are a little dry and possibly depressing (who likes paying taxes?), but once you get them done you can have some fun. Brainstorm all of the things you want to own and do. Don’t hold back.
After you create the list, categorize every item as a “Would Like” or an “If Possible.” Would Like items are things that are important to you such as buying a new home and paying for your children’s education. If they’re not already on your list, I would add “pay off debt” and “save for retirement” to this list. If Possible items include everything else: travel, gifts to family members, and quitting your job.
Once you’ve brainstormed everything you want to own and do, rank those items in terms of importance. Here’s how your list should start:
- Pay taxes
- Pay off debt
- Save for retirement
- Everything else…
Step 4 – Determine what is possible after receiving sudden wealth
Before you buy that house or car and before you quit your job, you need to determine how far your windfall will allow you to go. Give your ranked wish list to your investment advisor to help you calculate what you’ll be able to do without getting into financial trouble down the road.
This is one of the most important steps because you’ll know what you can do and what you can’t. You won’t wake up in a cold sweat wondering if you can afford the trip to Hawaii—you’ll know. If the people who received the money suddenly I discussed earlier had taken the time to complete just this step, they wouldn’t be broke or in debt today.
Once you know what you can afford, go the extra step and develop checks and balances. For example, make a commitment with your CPA or investment advisor that you will run all purchases by them if they exceed more than a set dollar amount. Or that you’ll give yourself a “cooling off” period—say 48 hours—before you make an impulse purchase over a certain dollar limit. You’re not asking permission—it’s your money. You are simply doing what you can to make sure you are making wise decisions with your money and not letting your emotions take control.
Step 5 – Go back to school
You don’t really have to go back to school (unless you want to!), but you should take some time to get a financial education. Your financial team should explain concepts and strategies so you understand them, but there’s no substitute for studying the issues on your own.
You can take a class at your local university on business or personal finance. If the thought of sitting in a classroom brings tears to your eyes, there are plenty of alternatives. Various organizations hold conferences and mini-courses that specifically address managing wealth. You can find sudden wealth resources here.
When all else fails, you can always count on a good book. I authored the book, The Sudden Wealth Solution: 12 Principles to Transform Sudden Wealth Into Lasting Wealth. It’s a great resource for people who are suddenly receiving money.
While you’re reading, create a list of questions. Then bring them with you when you meet with your advisors. They’ll be able to answer your questions or clarify anything you’ve read.
Step 6 – Monitor, monitor, monitor
In real estate, it’s location, location, location. With sudden wealth, it’s monitor, monitor, monitor. The financial plan you created yesterday is already out of date. That’s okay and it’s to be expected. This doesn’t mean you need to constantly make changes, but it does mean you should be kept apprised of what’s happening and if you’re getting off track.
In practice, this means meeting with your investment advisor and CPA at least once a quarter (or more often if events in your life have changed). If the sudden wealth recipients discussed earlier had monitored their financial situation, they’d be in much better financial shape right now.
Here’s the minimum you’ll want to know every quarter:
- Net worth. This answers the question—how much am I worth after paying all of my debts? It’s an important number that needs to be reviewed often. Excessive spending and/or poor investment returns can eat away at your assets and decrease your net worth over time. We have an online/mobile tool called 360 Wealth View where clients can instantly see their updated net-worth and investment allocation anytime they wish.
- Cash flow. This report shows a running tally of your income and expenses. You should be able to see exactly what was earned and what was spent over a period of time (e.g., a quarter). You’ll want to be aware of two situations. First, are you earning less than you projected? Second, are you spending more than you projected? Occasionally earning less or spending more than you thought shouldn’t be an issue, but if it becomes a regular occurrence, you’ll need to make a change.
- Investment summary. You should know how your investments performed over the last quarter and you should get an economic/financial update. Again, a quarter of underperformance shouldn’t be a problem but several quarters might be.
These three reports will keep your finger on your financial pulse, but because you’re only reviewing these four times a year, you should have plenty of free time to enjoy your new money.
Bonus Step – Give back
Receiving money suddenly can open a lot of doors and provide fantastic opportunities. There’s nothing wrong with enjoying your windfall. Now might be a good time to let those who are less fortunate also share in your success. The emotional benefits can be priceless, and you might even get a nice tax break. Just make sure you talk to your CPA and investment advisor to make sure it is in line with your overall plan and that you are maximizing all possible tax benefits.
Whatever the source of the sudden wealth, it’s yours now. Relax, take a deep breath, and follow these six steps to ensure you are making the best financial decisions you can.
About the Sudden Wealth Financial Advisor
Robert Pagliarini, PhD, CFP®, EA has over 26 years of financial planning and investment management for the suddenly wealthy. Robert is a CFP® Ambassador, one of only 50 in the country, and a real fiduciary. He authored the book The Sudden Wealth Solution: 12 Principles to Transform Sudden Wealth Into Lasting Wealth in hopes to help those deal with sudden wealth and the emotions that come along with it. In addition to his Ph.D. in financial and retirement planning, he earned a Master's in Psychology to better understand and be equipped when helping clients manage a windfall. He has helped clients from across the United States who have received a windfall from an inheritance, lawsuit settlement, business sale, stock options, sports and entertainment contracts to make sense of their sudden wealth. When he is not helping the suddenly wealthy, you can find him writing personal finance books and articles for Forbes. If you're needing help managing wealth, contact Robert directly.