10 Tips to Managing Sudden Wealth and Financial Windfall

Like so many elements of life, coming into sudden wealth can be a double-edged sword. Often considered a blessing and a curse, sudden wealth or a large windfall can bring opportunity and difficulty. And whether the funds were earned from a massively successful business venture, an unexpected inheritance, an initial public offering (IPO), a major sale (for example of a property), a big raise or up-front salary for a new job, knowing how to manage sudden wealth isn’t as simple as it may sound. It requires careful consideration, knowledge, discipline, and strategic planning.

Financial Planning for Sudden Wealth

Let’s take a closer look at some essential tips for individuals who find themselves in the enviable–but often overwhelming–position of receiving a sudden large amount of wealth.

1. Take a moment.

Before you make any significant or life-altering decisions, take a step back and reflect on your newfound financial situation. Feeling stressed out or unsure of the next step is normal. In fact, “sudden wealth syndrome”¹Cobb, Lacey CFA, CFP®. “Sudden Wealth Syndrome and How to Avoid It.” Empower, www.empower.com/the-currency/life/sudden-wealth-syndrome-tips is a real thing.

According to Empower, this condition is characterized by “issues, stress, confusion, and often a large amount of money mismanagement that can accompany coming into sudden wealth or a large windfall… A good example of a group of people experiencing what looks like sudden wealth syndrome are professional athletes: the minimum starting salary²Abdalazem, Reem. “Who Are the Lowest-paid Players in the NFL? Is There a Minimum Salary in Pro Football?” AS USA, 12 Feb. 2024, en.as.com/nfl/who-is-the-lowest-paid-player-in-the-nfl-is-there-a-minimum-salary-in-american-football-n-4 for an NFL player is $705,000 for 2022.

 

According to a report by Sports Illustrated,³Parker, Tim. “Why Athletes Go Broke—and What the Rest of Us Can Learn from Them” Investopedia | investopedia.com, 27 Feb. 2023, https://www.investopedia.com/financial-edge/0312/why-athletes-go-broke.aspx by the time former NFL players have been retired for two years, 78% of them have gone bankrupt or are under financial stress; within five years of retirement, an estimated 60% of former NBA players are broke.”

So, take some time to carefully evaluate your priorities, values, and goals. People who come into sudden wealth often make too many commitments or fail to truly understand their new circumstances. And while it can be tempting to splurge on a brand new vehicle or to give a large amount of money to your friends and family, it’s important to take the time to understand your capabilities, given your new situation, before making any financial commitments.

Here are some helpful questions to ask yourself:

1. What are your short-term and long-term financial goals and aspirations?
2. How realistic are your expectations?
3. How much do you know about sudden wealth management?

We advise working with a knowledgeable financial planner who understands your unique situation and can offer objective advice. It may also be helpful to seek advice from a mental health professional to help you navigate the emotional and psychological impact of sudden wealth acquisition.

2. Know what to do with sudden wealth.

Financial literacy is an important part of making informed decisions about your wealth. Fortunately, there are many helpful resources available. Take some time to educate yourself about investment strategies, setting up trusts, estate planning, and the short-term and long-term tax implications of sudden wealth. Learning and understanding the basic components of personal finance will help you communicate your needs and goals effectively with your sudden wealth advisor.

3. Set a budget.

While acquiring sudden wealth leads many people to overspend, creating a budget is essential, regardless of your financial situation. Even if you now have substantial wealth, tracking and managing your expenses and income will help you maintain financial discipline. When establishing a budget, make sure to closely watch your spending habits and set realistic limits. This simple habit will help to ensure that your funds remain sustainable over time.

4. Consider managing sudden wealth professionally.

When it comes to successful investment strategies for how to manage sudden wealth, an experienced CERTIFIED FINANCIAL PLANNER® professional can help you diversify your investments across various asset classes. This protects your wealth from market fluctuations and economic instability. Consulting with a CERTIFIED FINANCIAL PLANNER® professional can also help you create a personalized investment strategy that aligns with your short-term and long-term financial goals, while reducing unnecessary financial risk. And let’s not forget one of the biggest benefits of bringing in the professionals: they can offer unbiased, objective advice at a time that can be highly emotional and confusing. Make sure you have an emergency fund.  

No one likes to think about losing their money. But regardless of how much wealth you’ve accrued, unforeseen circumstances happen. Establish a robust emergency fund that will help protect you in unexpected events. By creating an emergency fund, you can ensure that you have the resources necessary to handle medical emergencies, unforeseen market downturns, and more.

5. Resist the urge to spend impulsively.

Yes, the undeniable allure of luxury items and exotic vacations can be tempting, but it’s crucial to resist the urge to indulge in impulse spending. Make sure to evaluate your long-term financial goals regularly, which will help you select the investments that align with your objectives. Remember that sustainable wealth requires disciplined financial behavior and commitment.

6. Tap into your charitable side.

Supporting charitable causes not only helps others and improves your community, it can also bring personal fulfillment. Establishing a donor advised fund (DAF) or contributing to organizations with values that align with yours will allow you to make a positive impact on those around you.

Don’t have the time? Imagine having the power to make a real difference in the world, but without the burden of managing a complex foundation. That’s the beauty of a Donor Advised Fund (DAF). For someone who values their time and resources, a DAF can provide the perfect balance between impactful giving and effortless philanthropy.

Unlike foundations, which require significant time and resources to establish and maintain, DAFs are incredibly simple and require minimal effort. Think of it like having a dedicated philanthropic account, managed by experts, that allows you to focus on what truly matters: choosing the causes closest to your heart.

Additionally, donating cash or valuable items to nonprofit organizations offers potential tax-saving benefits.

7. Partner with a sudden wealth financial advisor.

Unfortunately, wealthy individuals often fall victim to legal and financial problems. Applying asset protection strategies can protect your funds from potential creditors and unwanted lawsuits. Consult with financial and legal professionals who can help you look into options such as trusts, limited liability corporations (LLCs), and other legal structures that offer protection.

Read More: Three Questions That Can Help You Avoid Investment Scams

8. Secure Your Legacy.

Once you’ve come into sudden wealth, make sure that those funds will be distributed in the future by developing an estate plan. This involves creating a will, setting up a trust or multiple trusts, and designating beneficiaries who will receive your assets. Work with experienced financial professionals who will help you navigate the complexities of effective estate planning.

9. Focus on your mental and physical well-being.

While effectively managing your newfound wealth is crucial, it’s just as important to maintain a healthy work-life balance. Try to pursue activities and hobbies that bring joy and fulfillment to your life. Make your mental and physical well-being priorities. This will help you sustain the energy and focus necessary to make more-informed decisions.

10. Count your blessings.

A sudden change in income could lead to dramatic changes in your behavior or attitude–for better or worse. That’s why it’s essential to stay humble, grounded, and thankful for the financial opportunity you’ve been given. Focus on cultivating meaningful relationships and surrounding yourself with a supportive network that values you for who you are, not just your financial status.

Sudden Wealth Management: Take the Next Step

Navigating sudden wealth requires a thoughtful and strategic approach. By taking the time to reflect on your values, building a diversified financial portfolio, and implementing sound financial practices, you can ensure that your newfound wealth becomes a source of long-term stability and fulfillment. Remember that wealth is a tool. When managed correctly, it can open doors to a brighter and more secure future.

Get started today. Work with a Team Hewins CERTIFIED FINANCIAL PLANNER® professional who can help you achieve your financial goals.

Team Hewins, LLC (“Team Hewins”) is an SEC-registered investment adviser; however, such registration does not imply a certain level of skill or training, and no inference to the contrary should be made. We provide this information with the understanding that we are not engaged in rendering legal, accounting, or tax services. We recommend that all investors seek out the services of competent professionals in any of the aforementioned areas. Certain information provided herein is based on third-party sources, which information, although believed to be accurate, has not been independently verified by Team Hewins. Team Hewins assumes no liability for errors and omissions in the information contained herein. Nothing contained herein may be relied upon as a guarantee, promise, assurance, or a representation as to the future. .