Everyone dreams of it: waking up with a million or two unexpectedly in the bank account, or seeing your numbers come up on the powerball. Windfalls like this can have a big impact from a wealth planning perspective.
However, the sobering fact is that many people who come into sudden wealth end up losing it. Research by economists Hankins, Hoekstra and Skiba found that lottery winners were more likely to file for bankruptcy than the rest of the population.
There’s an actual psychological condition known as Sudden Wealth Syndrome, where the stress and pressure of an unexpected financial windfall leads to emotional issues and behavioural changes.
The impact of Sudden Wealth Syndrome varies: you might feel guilty about your good fortune or feel isolated from friends or family or even paranoid about losing the money or people wanting your money.
Dealing with sudden wealth, whether from a lottery win, divorce, inheritance, redundancy, a lawsuit win or even selling a business, can be like a blowtorch in that it forces you to consider a whole range of confronting questions and decisions. Some of these scenarios you can plan a bit for, others happen overnight.
No matter how much money you come into, the common denominator is that money does not last forever. Developing a strategic plan helps ensure the funds last longer and meet your needs.
My counsel to clients who have had any type of windfall: don’t tell people you’ve won, until you’ve had the chance to get solid financial advice.
Stress of sudden wealth
Coming into sudden wealth means you face the pressure to make unexpected decisions about your work, your loved ones and your future.
Money, for all the opportunities and greater choices it affords, can be a major source of stress and anxiety if you’re not used to having it. Many people get anxious because of the sheer number of decisions to make.
The common questions that go through your mind: do I keep working? Should I buy a new home?
Maybe loosen the purse strings and treat the extended family to a big overseas dream holiday before I get serious with my money?
Perhaps uproot the kids and send them to private school? But gee, that red Ferrari looks tempting.
There is also an identity crisis factor at play because you go from being an ordinary person to being wealthy overnight and this may come with unwanted fame or limelight, either with the broader public or even just within your own social circle.
The million-dollar question
Wealth is not a bottomless pit, so if you want to make it last you have to find a sustainable way to manage your new-found wealth.
There’s no one answer of what to do with a windfall, as best use of the money will vary widely depending on your personal circumstances.
You’ll need time and space to work out what is most important to you and how to achieve these important goals, so I always suggest keeping your windfall discrete and seeking professional advice immediately.
Putting in place a solid financial plan can ensure the funds are sustainable and that you don’t make poor investment or spending decisions.
Your professional advisers should consist of a financial adviser, a tax adviser and even a legal adviser depending on your personal situation and financial goals and objectives.
Friends and family are the ones closest to you, but unfortunately, they can also become the biggest threat to good management of a windfall. You may feel guilty or obliged to help them. Money can make some people greedy or irrational.
Within your circle of friends and family, there is always bound to be someone who has financial problems and may ask you for assistance. Don’t make quick decisions – take as much time as you need to work out what’s most important to you.
Impulse purchases sound like fun, but in talking to people who have come into a windfall and lost it, most rue these decisions as reckless and wasteful. It may sound boring, but planning carefully is the key.
Finally, work with the experts to consider the tax consequences of your windfall and whether you may have to pay taxes.
Grace Bacon is the Director of RSM Financial Services Australia (AFSL 238 282), advising clients on wealth management, retirement planning and succession planning.
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This article first appeared in The Sydney Morning Herald and was syndicated in The Age, Brisbane Times and other major publications.
Grace Bacon speaks to Scott Haywood on Money News (2GB, 3AQ and 4BC) about how there's a lot more to managing the impact of a lottery windfall.