12 Jun Sudden Wealth - How To Deal With A Life Changing Amount Of Money
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It’s not about the money. It’s about the life I want to live. (Unknown)
Some people accumulate their financial wealth gradually over time; others find that it is thrust upon them.
What constitutes ‘sudden wealth’ depends on the individual. A useful definition might be ‘more than you are used to dealing with.’
Whether by the widely known (but not very common) lottery or football pools win, an inheritance or the sale of an asset such as a business, sudden wealth can be hard to come to terms with.
While it might seem to outside observers that someone in this position now has all their money problems solved, the truth is they may be just beginning.
Many of the issues surrounding managing a sudden increase in your wealth apply regardless of the nature of the liquidity event, but some will apply to specific circumstances.
For example, selling and exiting a business into which you have put your heart and soul over many years can be a stressful time emotionally. You may find yourself trying to deal with feelings of a loss of purpose and identity.
If you now have sufficient wealth to be financially independent (i.e. paid work is now optional) and you do decide to stop working, how will you occupy your time and find a new purpose to motivate yourself? If you have children, how will you instil in them the sense of needing to work to become financially independent themselves when they do not see their parents doing the same?
Having managed to become wealthy, whether by your endeavours as an entrepreneur or as a result of good fortune, the task now is to avoid becoming poor. This means determining a strategy for managing your wealth.
If you didn’t get the deferred-gratification gene, you’ve got to work very hard to overcome that. (Charlie Munger)
Firstly, take your time. There is rarely any need to make major decisions quickly. Take the time to reflect on where you now find yourself and where you want to go from here. Receiving a substantial amount of capital is usually an emotional time. While we might like to think that we behave rationally, the evidence shows that when in an emotionally heightened state, we are prone to stress. And when we are under stress, our rational decision making process is impaired.
There are times when making quick decisions is helpful but thinking about the future, which is an essential aspect of dealing effectively with financial wealth, is rarely one of them.
Ensure also that you take the time to find a team of professionals who can provide advice on any financial, legal and taxation aspects so that you fully understand the implications of any action you decide on.
If you are considering engaging a professional with whom you have not worked previously, investigate their background and qualifications. If you are liquidating your life’s work in wealth creation, or this is a one-off chance to change your life as a result of a windfall, you may not have the opportunity to repeat the exercise if it goes wrong. Ask for testimonials from other clients who have gone through a similar experience with the adviser so that you can avoid being the one on whom they learn what not to do.
While a team of specialists is valuable when dealing with specific matters requiring their technical expertise, someone needs to be co-ordinating them to ensure that nothing slips through the gaps and to keep in mind the big picture.
A lawyer can set up a trust, and a tax adviser can limit the amount of tax paid on your portfolio. But unless you know how much you can afford to gift to the trust and what investment return you need to achieve to meet your goals, such advice operates in something of a vacuum unconnected to your own needs.
A decent financial planner is probably the only professional you might engage who will have sight of the big picture. They are also well versed in operating as their clients’ ‘Chief Financial Officer’ and will be best placed to co-ordinate the activities of everyone involved.
The quickest way to double your money is to fold it in half and put it in your back pocket. (Will Rogers)
Uncomfortable as it may be, do not assume that your friends and family will be on your side. When word gets around about your newfound wealth, don’t be surprised if assorted long lost family members and new ‘friends’ appear as if from nowhere. Always bear in mind that their motivations may be different from yours. You may feel pressure (imagined or otherwise) to make promises to people, which will compromise your financial future.
An extreme way of avoiding such pressure can be to move house to a different (and more affluent) area, or taking up new and more expensive pastimes. However, these steps can isolate you from your existing social networks and consequently from the ongoing interactions and activities which you enjoy and which help to reduce your stress, so think hard before making such a drastic move.
Keeping your good news from others does not preclude you from telling them more in the future, but they cannot ‘unknow’ what you have already told them. It is worth mentioning to those who are aware of the situation that no financial commitments are going to be made for some time to avoid causing them any offence.
Does running out of money count as exercise? (Unknown)
It can be very tempting to splash out on some significant capital expenses initially. While this may be fine if the expenditure represents a relatively small proportion of the total, be wary of repeating the ‘one offs’ regularly as they can soon become a habit. One UK lottery winner spent the first few months buying a succession of expensive new sports cars, trading in each one when he got bored with it after a few weeks. This was a sure fire way to transfer his wealth to the car dealerships as he lost money on each trade-in.
It’s behaviour like this which helps to explain why a surprisingly large percentage of people who come into sudden money have spent it all within only a few years. It may be helpful to create a wish list and to review it periodically to avoid impulse buys.
Whatever your income, always live below your means. (Thomas J. Stanley, The Millionaire Next Door)
In financial planning terms, the first step is to establish your goals. These may be categorised into up to four groupings: lifestyle costs; achieving your dreams; provision for the family and making a difference to the broader world. Applying some initial estimates of the potential costs of these goals can then provide a starting point for how you can plan to achieve them.
It is essential to be aware that pressure (or the fear of it), whether from inside or outside the family, can influence how you may feel an expectation to pursue a particular lifestyle or philanthropic expenditure. Remember that it is your plan and your goals that matter, so resist the temptation to pay too much attention to the suggestions of others.
The next step should be to put together a lifetime cashflow that incorporates your anticipated future expenditure and takes account of your expectations for how this might change over time. This allows you to determine how much of your capital might be required to support your future lifestyle, given the degree of investment risk that you are willing and able to take. You should also allow for retaining sufficient cash to meet both anticipated and unplanned potential expenditures in the next few years, as this will reduce the risk of needing to draw on your long term portfolio.
Remember that the only purpose of money is to get you what you want, so think hard about what you value and put it above money (Ray Dalio)
The excess (after allowing for any taxes due on the wealth event itself and paying off any debts that you have) is what is available for other purposes, whether these be adding to your long term portfolio, gifting, investing in a new enterprise or spending on the wishlist items.
The military strategist Moltke wrote that no plan survives first contact with the enemy and you should not expect that putting a plan in place is the end of it, as there will inevitably be changes ahead. Your plan, therefore, needs to be reviewed regularly, generally at least annually, to ensure that it remains fit for purpose and to allow you to make the necessary course adjustments to address issues before they become serious problems.
Transitioning to a situation where paid work has become optional rather than essential can represent a fantastic opportunity to live your life in the way you may have always dreamed. While there are still challenges to face, overcoming them is likely to be considerably more manageable if you take the time to equip yourself with the necessary tools, of which the most important is a coherent plan.
Money is only a tool. It will take you wherever you wish, but it will not replace you as the driver. (Ayn Rand)
Carolyn