Sudden wealth isn’t all smooth sailing and shopping sprees. Here are the pitfalls most people don’t anticipate.

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Sudden wealth isn’t all smooth sailing and shopping sprees. Here are the pitfalls most people don’t anticipate.

Mankind’s obsession with money has created many enduring illusions. Buy the right things and the people whose approval you seek will have no choice but to love you. The more you spend on something, the more it tells the world who you are.

Another widely believed fantasy we have about money is that the moment we’ve had enough of it, all our problems will be over. How else do you explain that 1 in 4 Americans plays the lottery once a month or more?

But whether it’s winning the lottery or something more ordinary like a divorce settlement, inheritance, or settlement, sudden wealth often creates a whole new set of problems — emotional, interpersonal, and even financial — that most people can’t deal with .

Sudden Wealth Syndrome is real

In the 1990s, Stephen Goldbart, a psychologist at the MMC Institute in San Francisco, studied the effects of sudden wealth on entrepreneurs during the Silicon Valley gold rush. As a result of her increasing net worth and radically changed lifestyle, Goldbart’s subjects showed signs of paranoia, excessive guilt, and insomnia while simultaneously expressing fear of losing control.

To describe the various stress-related disorders that infect the nouveau riche, Goldbart coined the term Sudden Wealth Syndrome, or SWS. But it’s not reserved for tech billionaires. It can happen to anyone whose life is suddenly transformed by a dramatic increase in wealth, says Stanley Tepner, portfolio manager and first vice president at CIBC Wood Gundy in Toronto.

“The usual [examples] Usually it’s either a divorce settlement or an inheritance, but you also have insurance arrangements and the sale of businesses and real estate,” says Tepner.

Tepner has been interested in the negative connotations of financial good fortune for two decades. He says there are three areas where the suddenly rich tend to be caught unawares by their newfound burdens.

1. What to do with the money?

Ironically, a sudden cash injection can get in the way of sound financial planning. People can show radically different reactions. Some will throw money at any investment that catches their eye. Others may be paralyzed by the opportunities presented by new fortunes.

Just because someone is now wealthy doesn’t mean they know anything about money management, Tepner explains, or that they’re wealthy enough to withstand a series of bad investment decisions.

For example, a woman who just sold a successful towing company may already know all about building her business. But having to manage money instead of people and equipment can throw her completely out of her element.

“Some are too cautious,” says Tepner. “Some, on the other hand, are too reckless … not realizing that this may be the only significant, dramatic increase in their net worth they will experience in their lifetime.”

A life-changing stroke of luck cannot replace a detailed personal financial plan that should consider four factors: your income, financial needs, goals, and risk tolerance.

2. How to deal with your emotions

Getting too much money can trigger many emotions, from the heartbreaking joy of winning the lottery to the mix of sadness, guilt and gratitude that can accompany an inheritance. When those emotions mess with someone’s financial logic, Tepner says problems can arise.

He cites the example of a client who invested all of the money from a sizable inheritance in GICs that earned next to no interest, rather than investing it in investments that could potentially produce healthier returns. The client did not want to risk a penny of what her parents, who are now deceased, had worked for their entire lives.

While the client saw her approach as a kind of homage to her mother and father, Tepner says, “It’s almost like a second tombstone” that prevented her from converting her life savings into something greater.

Other situations, such as death or divorce, can throw a family’s financial manager out of the picture, forcing a less experienced partner into a financial decision-making role for which they are unprepared.

“A lot can go wrong when investing,” says Tepner. “The risk is whether you can manage your own emotions well enough to best manage that money for yourself.”

3. How wealth affects your relationships

We all know the cliché of a newly wealthy person’s friends suddenly looking for handouts. As much as this sounds like a TV trope, Tepner says it’s real, but the corrosive effect on personal relationships can be the most unsettling aspect of sudden wealth.

It’s also the hardest thing to prepare for: having your lifelong friends treat you differently because of your suddenly lavish bank account. While you’ll probably be comfortable picking up the check when you first start making money, it’s probably getting old if you’re still expecting this years later.

“Expect to be bombarded with phone calls, emails, mail, and door knocks from complete strangers who have their own plans for the new money,” says Tepner. “We hear a lot about ‘the distant cousin who needs help.'”

Whether it’s about opportunistic hang-alongers or deciding how best to invest your newfound wealth, Tepner advises not making any sudden decisions.

Don’t treat yourself to the biggest yacht at the boat show and don’t put down a down payment on a $3 million house. Take your time to deal with the flood of emotions you will be feeling, and then proceed cautiously and with a roadmap.

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This article is informational only and should not be construed as advice. It is provided without any guarantee.

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