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How to Manage Money From Sudden Wealth

Strategies to make the most of a wealth windfall.

As appeared in Wealth magazine

How to Manage Money From Sudden Wealth

Strategies to make the most of a wealth windfall.

For every inspirational rags-to-riches tale, there’s a cautionary one: the lottery winner who squandered her wealth or the sports star who went broke a few years after retirement.

A sudden influx of wealth can quickly and dramatically change a person’s life and lifestyle. But the challenges of managing a wealth windfall are many, and the consequences of mismanaging it are severe. “Many sudden-wealth recipients think they have more than they do, so they may develop unsustainable spending habits that they think can last forever,” says Garrett Buchanan, financial consultant for Northern Trust. “But they’re usually wrong.”

If you’re the recipient of sudden wealth, consider these strategies to translate your new affluence into a sustainable lifestyle and benefit future generations.

Set Goals

When you’re suddenly awash in cash, it may be only natural to immediately think of big-ticket purchases like new cars and exotic vacations.

Not so fast, Buchanan says: “It takes time to adjust to having wealth. A good place to start is with setting goals, both short-term and long-term. Think about what you want to accomplish with your wealth. It’s a paradigm shift, and to navigate through it successfully, you need to understand if you have enough to achieve your goals, and then if there is more left after that.”

Perhaps the best way to accomplish this is to create a plan that incorporates all aspects of your financial life. Using a Goals Driven Wealth Management approach, goals can be broken down into four major categories:

  1. Lifestyle: Do you have enough to live at a comfortable level?
  2. Dreams: What do you envision for your future?
  3. Family: How will you provide for your family?
  4. Legacy: Will you make a philanthropic impact?

Once you identify your goals around each of these areas, it becomes much easier to associate dollars needed to fund those goals.

“When you suddenly have a large pot of money, you need well-defined strategies tied to specific objectives because otherwise there’s nothing to stop you from raiding the pot,” Buchanan says. That takes time and usually requires help.


Hire an Advisor

There are two distinct advantages to hiring a financial advisor, Buchanan says. First, an advisor can help educate you about exactly what you can – and can’t – expect to accomplish with your newfound wealth. Sudden-wealth recipients may not know how to estimate financial capacity, and an advisor who is familiar with managing large sums of money can help you develop a long-term plan based on long-term goals.

“Your advisor can tell you whether you can afford to put your kids through Harvard. Your advisor also can tell you how much you can spend every year without potentially running through your money,” Buchanan says. “It’s important to quantify those things before you start spending.”

Second, an advisor can act as a buffer between you and the many people who may ask for a piece of the pie. “You can use your advisor to be the bad guy,” Buchanan says. “You can tell your friends and family, ‘I’d love to help you out, but I’ve structured my financial plan in such a way that I have to demonstrate to my advisor that your request is of value.’”"Everybody's got to get that itch to spend out of his or her system. If you really want that sports car, you could consider getting one. Just know that you shouldn't keep getting one every year for the rest of your life."

Make One Splurge Purchase

In a perfect world, sudden-wealth recipients would stash their newfound wealth in a portfolio and refrain from spending it until they are prepared to do so wisely. Practically, however, it’s hard to sit on all that money, particularly for people who aren’t accustomed to having extra spending money. Spend some money, Buchanan says, but make it a singular, defined splurge – and then resume spending according to a disciplined plan.

“Splurge if you need to. Everybody’s got to get that itch to spend out of his or her system,” he says. “If you really want that sports car, you could consider getting one. Just know that you shouldn’t keep getting a new one every year for the rest of your life.”

Apply Self-defense

You know yourself. If you know that you won’t be able to resist frivolously spending the money in your account, don’t give yourself unrestricted access to so much money. Instead, consider putting some of the wealth in a trust, paying cash for your home or pursuing some other strategy that protects you from your lack of discipline. “It’s about understanding your weaknesses and your habits, and planning against them,” Buchanan says.