Sudden wealth event considerations
A financial windfall can be a real blessing. Whether it’s from selling a business or real estate, an inheritance, lottery winnings, or a legal settlement, a sudden wealth event can change your life. For those who don’t know how to handle new wealth, however, the blessings can turn into a curse, as there are many potential problems that can obliterate your good fortune.
Beware of SWS
You may have heard about people coming into a lot of money suddenly- and then losing it all. Indeed, statistics show that about two thirds of people who have a sudden wealth event will deplete that money within just a few years.
Why are the numbers so abysmal? Psychologists have attempted to explain it by coining the phrase, “Sudden Wealth Syndrome (SWS). SWS refers to a psychological condition that occurs in individuals who have become suddenly wealthy. SWS is an identity crisis of sorts. It causes negative emotions: isolation, guilt, and fear. These can lead to deleterious behaviors that cause the sufferer to lose their wealth.
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Pitfalls of sudden wealth
The biggest problem with a sudden wealth event is its suddenness. Getting more money than you’re used to being responsible for—and getting it all at once, can bring you outside of your comfort zone. It can cause anxiety, indecision, and fear, and it can cause you to make hasty or emotional decisions.
Another major factor is pressure. Family members, friends, and professionals all can bring tremendous pressure on the newly wealthy person. If your windfall is publicized, the pressure cooker can switch to high. Or the pressure can simply come from within the sufferer. Some people may feel pressured to distribute to family or to only use it for philanthropic causes. Feelings of guilt might accompany the windfall, making them vulnerable to opportunistic people.
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Managing wealth the right way
How can you avoid falling victim to Sudden Wealth Syndrome? Good planning can make all the difference. With a good plan, you can be prepared for the pitfalls, and avoid them.
Your plan should prioritize the tax considerations, and address any cash flow, asset and debt issues. It should also consider privacy and protections from fraud, scams, and opportunism. It’s here that professional advisors can really help. At Blankinship & Foster, our wealth management experts will help you with all these issues as well as long term financial planning issues such as retirement, investment, asset protection, risk management, and estate planning. Having an experienced financial advisor in your corner to help guide you is an important first step.