Sudden Wealth May Be More Common Than You Think

11/18/2019

Sudden wealth brings recipients emotional and financial responsibility.

By Kranston Kincaid, CDFA®
Vice President
Financial Advisor
HilltopSecurities Wealth Management

 

Some people gradually accumulate financial wealth over time, but others can suddenly acquire wealth from an expected or unexpected source. While most people primarily think of lottery winners as recipients of sudden wealth, they are rare. In fact, sudden wealth can take many forms.

Most commonly, my clients gain sudden wealth for the following reasons:

  • Death of a spouse

  • Divorce

  • Divorce

  • Retirement

  • Lawsuits/settlements

  • Inheritance

  • Business Transition

  • Employee stock options

  • Entertainment or athletic success

  • Winning the lottery

The Emotional Impact of Sudden Wealth
A sudden influx of wealth can have a major impact on your life, both financially and emotionally. In fact, my clients often speak to me about the emotional burden that comes along with sudden wealth, especially when it’s the result of inheritance. Because receiving an inheritance also means you have likely lost a parent or loved one, the experience can cause conflicting emotions and cloud judgement in terms of wealth allocation.

While an inheritance is meant to preserve wealth through generations, emotional vulnerability and lack of financial understanding leads many sudden wealth recipients to spend rather than save. A study conducted by Ohio State’s Center for Human Resource Research for the U.S. Bureau of Labor Statistics found nearly one in five participants who inherited a significant amount of money either lost or spent the entire amount.

Yet, as mentioned in the previous section, an inheritance isn’t the only way you can become the recipient of sudden wealth. And while the other ways people often come into large sums of money seem like a cause for happiness (and, initially, they are), those feelings are followed by uncertainty, guilt, and fear of losing the money.

Common Wealth Destroyers
It’s counterintuitive to focus on the negative aspects of receiving sudden wealth. However, failing to consider the unexpected pitfalls leaves you more susceptible to wealth destroyers.

Common ways sudden wealth can be mismanaged include:

  • Giving away too much money

  • Extravagant spending

  • Poor investing and planning

  • Lawsuits

Of course, asset-eroding traps pose a risk to anyone, but we see them impact the suddenly wealthy especially often. Even monetary gifts with the best intentions—like making a charitable donation or investing in a relative’s startup—can leave you empty-handed.

Sudden Wealth Best Practices
The financial and emotional impact of abruptly obtaining a large sum of money can make focusing on tax savings, asset allocation, and protection incredibly difficult. As a result, the most important thing to do when you learn of your sudden wealth is to breathe; you rarely need to make any immediate major financial decisions.

After giving yourself enough time to process your windfall, you should consider speaking with a professional who understands the intricacies of sudden wealth and can help you grasp the reality of your new financial situation. They will often work with you to understand what your money means to you, and give you advice on how you can make smarter, more informed decisions when it comes to investing, giving, and spending.

Helping You Navigate Your Windfall
Sudden wealth can occur for various reasons and you may or may not expect it. If you find yourself caught off guard by a financial windfall or you plan to receive a large sum of money or assets in the future, you should engage the help of a professional financial advisor.

My team and I have developed and refined a process to help clients manage both the benefits and pitfalls of sudden wealth. Our financial guidance spans before, during, and after your time of transition. Plus, we provide you with the tools, resources, and knowledge to put you in control of your personal finances and prepare for both the expected and unexpected.

To learn more about sudden wealth, download my Sudden Wealth Playbook today.

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