Key takeaways
Sudden wealth can bring personal and financial challenges and require major decisions.
A team of trusted financial professionals can help you put a sensible financial plan together.
There should be no rush to spend a windfall; in fact, it’s wise not to touch it until the initial euphoria has passed.
Winning the lottery. Receiving a large inheritance. Being signed by a professional sports team. Life events like these are not only exciting; they can create sudden wealth. While they sound like a dream come true, there are countless stories of newly affluent individuals filing bankruptcy just a year or two later due to poor money management.
Money and emotions are often tied together. Sudden wealth can create both personal and financial challenges, with major decisions to make and new feelings to navigate.
“The sheer elation or happiness that comes with receiving a large windfall is often followed by a strong desire to help others,” says Amit Poddar, senior vice president and market leader for U.S. Bank Private Wealth Management. “People come out the woodwork, and all of a sudden family members, friends and acquaintances have their hand out, because they know you have a lot of money that you didn't have before.”
Being lucky can also bring about guilt. “If you win the lottery or if you’re an athlete who gets picked up in a draft, there's guilt that you got lucky and somebody else did not,” Poddar says. “It can be similar to survivor’s guilt, and it can override your emotions at times, too.”
You can adjust to a financial windfall in a healthy way and protect your finances and wellbeing, however. Start by taking these three important steps when encountering sudden wealth.
How to manage a financial windfall
1. Assemble a team of trusted financial professionals
A large sum of money brings plenty of important financial decisions. If you’ve never experienced sudden wealth before, you likely won’t know how to properly manage it. Find both a good tax and financial professional to walk you through the process and offer objective advice and insights.
Be aware that friends or family members may volunteer to become your financial advisor. Poddar says it’s important to do your due diligence and look for someone who has experience helping individuals with sudden wealth. For example, choose a financial professional who is certified by the Certified Financial Planner (CFP) Board and a tax advisor who is affiliated with the American Institute of Certified Public Accountants (AICPA).
“Sports organizations like the NFL and NBA, for example, have their own certified advisors, and these individuals have gone through scrutiny,” notes Poddar. “For others, make sure you go to a reputable organization with financial professionals who have handled this type of situation quite a bit. To protect your money, it’s critical to get the right team of people around you.”
2. Adjust to sudden wealth by creating a financial plan
A windfall of $5 million may seem like an endless amount of money, but it’s important to realize that you’ll likely net a fraction of that after paying federal and state taxes, says Poddar.
“Depending on which state you live or work in, the taxes you must pay could be almost half of the money, which is substantial,” he says. “A lot of athletes or lottery winners don't realize this, and they go out and make big purchases, such as buying a huge house with a mortgage. That’s where skilled advisors come in.”
A CPA will inform you about your tax liability, and a financial professional will help you come up with a plan. A good place to start is the budget you had before the windfall, says Poddar.
“Let's say you earned $100,000 a year before, and suddenly you have $50 million of wealth,” he says. “Maybe start conservatively, planning to spend $300,000 a year to buy a slightly bigger house, car, and other items. Understanding these numbers will help you create a financial plan before you make the purchases.”
You also need to know that the risk of bankruptcy is real, says Poddar. “Sometimes people take on debt, like a mortgage, or they just start a business with personal debt,” he says. “When the pot of money is gone, they can be saddled with more debt than they had before the windfall.”
3.Take time to determine your values and financial goals for your sudden wealth
Finally, give yourself space and trusted guidance so you can best manage—and hold onto—your newfound wealth.
As previously mentioned, you’ll likely receive many requests for donations and gifts. Instead of fulfilling those solicitations, give thought to how you wish to spend your money. For example, identify the people in your life you truly want to help and the nonprofit organizations that are meaningful to you.
“Don’t be in a hurry to do anything,” says Poddar. “Take time to run through the elation and the guilt. And don’t make any big purchases or donations until you get hold of your own emotions.”
He suggests not spending any large sum for the first three to six months. While you’re making decisions about where to spend your financial windfall, putting it in a conservative account, such as a CD or short-term fixed income vehicle, would be a smart move.
“Do not start giving money away to friends or family until you’ve taken time to figure out what you’re doing and have started to work on an overall plan with trusted advisors,” says Poddar.
Learn how we can work with you to design a plan that puts you in control your financial future.
