You’re not rich, but you’re doing OK financially. When you daydream, your thoughts turn to that scuba diving trip you took to Hawaii, and you secretly yearn to open a scuba shop, with underwater tours of that protected marine life sanctuary in Maui.
Then one day, an inheritance lands on your doorstep. Regardless of the source of your new money — a sizeable gift from a relative, a lottery win, or a professional sports contract — it’s life-changing.
Many people are unprepared to handle sudden wealth. The Institute for Preparing Heirs has found that 70 percent of people who receive an inheritance will spend it in its entirety, and 80 percent of people will do so within two years. Case in point: Professional athletes and lottery winners experience a high frequency of bankruptcy. Before you quit your job, sell your house, say hello to the Aloha State, and buy that boat, a few cautionary words might help you avoid some of the problems associated with Sudden Wealth Syndrome.
Follow these tips to maintain your newly acquired loot:
1. It’s All About That Pace, ‘Bout That Pace
When wealth is sudden, it’s natural to want to change your circumstances fast and dramatically — which usually involves some big decisions. It can feel like your newfound money is burning a hole in your pocket.
Before spending that green, take stock of your life. What’s working for you? What isn’t? Though it’s tempting to go ahead and splurge right away, it may be beneficial over the long term to avoid any big decisions until you have considered your overall life plan.
2. Tune Out “Framily” Noise
Once your wealth is public (or even mentioned in smaller, private circles), distant contacts may start coming out of the woodwork. Friends and family alike may try to dazzle you with “get-rich-quick” schemes and business ideas for restaurants, sports clubs, and boutiques. If it looks too good to be true, don’t walk away — run!
People might also ask for a loan to pay off crushing debts, but more often than not, friendly loans become unintended gifts. Take a step back, breathe, and be a little selfish. Assess what you want to accomplish in life and how you can secure your financial future before trying to meet the needs of others.
3. Temper Your Desire for Instant Gratification
You may want to satisfy your own pent-up desire for a sports car, a designer wardrobe and jewelry, lavish parties, or long-awaited donations to worthy charities, but it probably shouldn’t happen all at once! Since both instant gratification and self-deprivation are unsustainable models, make a plan somewhere in between that suits your needs.
Remember, emptying the purse too early may jeopardize your long-term financial security. You may not be able to take it all with you, but you don’t want to trade impulsive, short-term gratification today for an uncertain future.
4. Look Closely Before You Take the Entrepreneurial Leap
Owning a small business may be the American Dream, and certainly there are those who create successful businesses. If you’ve received sudden cash, you may want to immediately open that scuba shop of your daydreams, but consider this before you launch: 50 percent of small businesses fail by their fourth year, and 76 percent of those failures have been attributed to incompetence and lack of experience.* It may be alluring to invest it all in the small business you’ve always imagined, but you’ll want to pace yourself in your entrepreneurial efforts.
If you haven’t already, take the time to put your business plan together and crunch the numbers on revenue and expenses. All too often, owners pay employees and vendors, and then there’s little to pocket for themselves. While you’re preparing to open a business, consider that investments in stocks, bonds, and cash may benefit your longer-term goals. While subject to market volatility, traditional investments are priced daily, so you’ll know what they’re worth. The assets are liquid, so you can withdraw them if needed quickly. Both an actively managed business and passively managed stocks and bonds may be desirable for a diverse portfolio. Going in with eyes wide open about the risks of any new investment is key.
5. You Don’t Have to Go It Alone
Sudden wealth can be life-altering in a positive way, but it can also be a great burden. Establishing a team of trusted advisors with inherent checks and balances may help you create a better road map for sustainable, long-term financial success. Try to seek out a multi-disciplinary team with independent specialists in accounting, legal, and investing, who can collaborate and facilitate an open dialogue. Utilizing specialists may help give you a more thorough analysis, by keeping you informed with various and differing points of view.
Wealth provides meaningful flexibility to do more for yourself, as well as the people and causes that are meaningful to you — provided you handle with care.
Deborah Stavis is a member of the DailyWorth Connect program. Read more about the program here.
Securities offered through FSC Securities Corporation, member FINRA/SIPC. Advisory and insurance services offered through Stavis & Cohen Financial, a registered investment advisor not affiliated with FSC Securities Corporation.
1330 Post Oak Blvd. Suite 2190 Houston, TX 77056 713-275-7750 main 800-962-2590 toll-free
*Studies compiled by Statistics Brain
Although this information has been gathered from sources believed to be reliable, it cannot be guaranteed and the accuracy of the information should be independently verified.
This material is intended for informational purposes only and is not intended for informational purposes only and is not intended to be a substitute for specific individualized tax or legal advice. Neither FSC Securities Corporation nor Stavis & Cohen Financial provide tax or legal advice. As with all matters of a tax or legal nature, you should consult with your tax or legal counsel for advice.
Investing involves risk, including the loss of principal. No investment strategy, including diversification, can guarantee a profit or protect against loss.