Did you know that 90% of lottery winners are bankrupt within 5 years? Or that 70% of all wealth transitions fail? The reason is that most people are resistant to change and only a minority can handle it.
The questions that normally surface when coming into large sums of money can be both technical like:
- “What should I do next?”
- “Who can help me?”
- “Who can I trust?”
and emotional like:
- “How did I get this money?”
- “How has this changed my life?”
- “Why are people treating me differently now?”
Frankly, new wealth presents challenges that can be disorienting and possibly dangerous. It can bring on a feeling of identity dissolution – the end of your old self. In particular, if there is suddenly no economic need to work, you may need to redefine yourself. This can affect your career, relationships, and lifestyle (like home, community, and location).
There are many possible sources of wealth. You can be born to it, like a trust fund. You can inherit it as a result of someone’s death. You can win it. You can create it from the sale of a business, idea, or as an entertainer. You can earn it through stock options. You can sue for it. You can marry into it.
The ability to keep this windfall depends a lot on from where the money came. If it came via inheritance from an unexpected death, it may be seen as “blood” money and the heir will tend to lose it quickly. Money “earned” from a business sale, for example, tends to stick better.
Besides the source of the money, people’s reactions are shaped by a number of influences:
- The windfall amount relative to your current income/net worth.
- Your age and stage in life.
- Your career satisfaction.
- Your class background.
- Your current community and social network.
- Your family dynamics.
- Your money style. For example, if you’re already frugal, you may have a better chance of keeping the money and vice-versa if you’re loose with money.
People who receive a windfall have a tendency to make irrational, impulsive decisions in the first few months after coming into this new-found money. Some examples of this include:
- The desire to get rid of money via gifting.
- Going on a spending spree.
- Giving up control of funds.
- The urge to move.
- The urge to change work.
- Feeling stuck or frozen.
- Hanging on to inherited stock for sympathetic reasons even though you know you’d be better off diversified.
- Doing nothing.
This emotional period can basically mirror the stages of grief. Our job as advisors is to anchor our client during this “wave” of emotions and listen to them. We help them understand their decision-making approach, focusing in on the decisions they would have made before getting this money. We can help the client realize the true value of the money. We help build the client’s support team which includes their estate planning attorney, CPA, etc. We help set goals to enable the client to “live a life that is about fulfilling their greatest potential.” And most importantly, we can urge the client to take ample time to make solid, not hasty, decisions.
Coming into a great deal of money sounds fantastic at first, but empirical studies show that without proper planning it can lead to many painful experiences and put people in worse shape emotionally, financially, and/or physically, than they were to begin with. By working with an advisor that cares, you may be part of the small minority who don’t lose their windfall and actually prospers!