Have you ever dreamed about winning the lottery? Or receiving a legitimate large check in the mail? What were your emotions in the dream? Shock? Surprise? Joy? Worry? Guilt?
“When people are surprised by sudden large amounts of money, the range of emotions they experience can vary greatly,” said Kristen Armstrong, strategic wealth coach with Ascent Private Capital Management at U.S. Bank. “What they imagined to be a happy scenario can, in real life, be rife with anxieties and complications.”
What is often unexpected is how heavily those emotions can play into the success of a person managing sudden wealth. For example, you may have heard stories about lottery winners who had to declare bankruptcy a few years later. Chances are, they possibly were overwhelmed by their emotions and hadn’t identified a purpose and strategy for their sudden wealth.
“While some inheritances, or winning a large cash prize can’t be planned, it’s good to have awareness of how positive and negative emotions can influence how the wealth is managed once it’s received,” said Amy Zehnder, strategic wealth coach with Ascent Private Capital Management at U.S. Bank. She recommends individuals and families who find themselves the beneficiaries of a life-changing amount of money do two things: find a peer for advice and define a purpose for the wealth.
Find a peer: Having money will change a person’s lifestyle. Some examples of what can happen include new friends and organizations asking for financial assistance, new expectations by outsiders concerning how you’re expected to act and behave, and even a change in how people interact with you. Zehnder said finding a peer who has history dealing with those new aspects provides an experienced opinion on how they can be managed.
Define a purpose: Zehnder doesn’t recommend doing this right away after the money comes into your life. In fact, she advises her clients to let the change in life settle first.
“I have a client who came into a large amount of money, and who decided to take a year off. He researched how much money he’d need to spend the year in Florida, but put the rest of the money into accounts he didn’t need to worry about managing. After that year had passed, he was ready to determine what he wanted his life to look like as a wealthy person,” Zehnder said.
Ready to move forward
Once you’re ready to define your purpose, Armstrong recommends thinking about four categories for the financial wealth:
1. Spend. This bucket includes everything on the want/need/wish lists. Keep in mind your emotions could quickly swing from euphoria at being able to purchase without limitations, to sadness, depression or regret if money quickly disappears.
2. Give away. Some individuals don’t want anything to do with being wealthy, and they choose instead to look for meaningful ways to give the money away. Others are excited about the positive impacts they feel their new wealth enables them to make, and enjoy making the transition from inheritor (or lottery winner) to philanthropist. Many more use philanthropy to take advantage of possible tax deductions which can help manage the new wealth.
3. Save. Saving money can take various forms. Many wealthy people look for ways to save money for future generations. Others are more interested in saving for large purchases. If your sudden wealth is a one-time income event, a saving “bucket” for the unexpected may make sense to help manage the money.
4. Invest. Many people will invest in businesses, the stock and bond markets, real estate or other investing opportunities in hopes of growing their wealth through avenues for additional income.
“Using these four buckets are a practical way to help create some balance, especially while dealing with the plethora of possibilities and conflicting emotions,” Armstrong said. “It can be confusing and a kill joy to only think of investing the money and dealing with taxes. Having the spending and giving buckets in there helps to support one’s joy in life. They provide satisfaction. But without the anchor of investing and saving, they’re unsustainable and anxiety can arise.”
Consider the end results
Zehnder has another bit of advice for clients who become wealthy unexpectedly: consider the unintended consequences of their money-spending actions. Lottery winners have been known to invest in a nicer home for other family members. Before doing so, the winner needs to consider if the recipient of the new home can afford the upkeep costs like taxes, utilities, landscaping services, cleaning services, etc. Or will the winner need to also take on that annual responsibility too?
These unintended consequences can influence a person’s emotions. In the example above, the lottery winner most likely will feel joy and happiness about the new, better home for the family. But five years down the road, will that joy and happiness turn to regret or even annoyance if the upkeep costs are still in the equation?
Armstrong and Zehnder advocate for people who find themselves in the wealthy category to become as educated as possible. Create a team of advisors from financial to legal to help you discover ways to manage the money with as little or as much of your participation as you desire. These experts can help you better understand your new life, better understand the financial options you have and provide you with background information, allowing you to make financial decisions with your emotions in mind.
Kristen Armstrong and Amy Zehnder are strategic wealth coaches for Ascent Private Capital Management at U.S. Bank.