Iowa Fiduciary Wealth Management

How to Manage Sudden Wealth

Have you experienced a sudden windfall? We’re here to help you navigate the complexities of sudden wealth. Ultimately, you’ll want to rely on a team of professionals to help advise you.

There’s gradual money and there’s money that comes suddenly. Most of us are used to gradual money—earning an income and building a nest egg over time. It’s a slow and steady process, but as our net worth increases over the years, we adapt and slowly become financially educated.

So what exactly is sudden wealth? Sudden wealth means getting more money than you’re used to being responsible for and getting it all at once. There’s no minimum dollar amount to qualify as sudden wealth. The distinguishing factor is that the amount has to be large enough to take you out of your financial comfort zone. Here are a couple ways on how to manage sudden wealth.

Where does sudden wealth come from?

Sudden wealth can come from anywhere, it could have resulted from luck or hard work. It may have been years in the making or it may have happened in an instant. Typically, money that comes suddenly originates from a lawsuit, divorce, sale of a business, inheritance, lottery winnings, sport/entertainment contracts, retirement packages, or stock options.

Regardless of where the money comes from, you’re the same person you were the day before you received it, but you are quickly thrown into a new and sometimes, an uncomfortable situation. While sudden wealth sounds like a great thing, it can cause anxiety, indecision, and fear in those who don’t adapt or develop a strategy. Here’s a couple strategies you can try implementing if you find yourself in a sudden wealth situation.

1. Build your sudden wealth financial team

The first step you’ll want to take is to create a financial team composed of people who have knowledge and experience with sudden wealth. They can help you navigate the numerous tax, financial, and legal issues that arise. There may be time-sensitive opportunities to deal with immediately so this is the first step you’ll want to take that can help you save or defer taxes.

For an essential team, you will want to have an experienced wealth advisor, estate attorney and a financial advisor, or a full-service fiduciary to cover all your bases. Your financial team needs to have only your interests in mind.

High-net-worth individuals can be subject to a variety of potential tax, liability and investment risks that, with proper planning, can often be mitigated. An experienced fiduciary may have a team of individuals they can use to address these issues. With various types of windfalls come several potential tax pitfalls as well as the need to create a cohesive investing strategy to provide support long term. Having a full-service fiduciary in these situations is helpful to determine what areas might be a good use of time and money. At the very least, a fiduciary may help mitigate the different situations you may need to work through.

2. Create a sudden wealth wish list

After you create the list, categorize every item as a “Would Like” or an “If Possible.” Would Like items are things that are important to you such as buying a new home and paying for your children’s education. If they’re not already on your list, I would add “pay off debt” and “save for retirement” to this list. Possible items include everything else: travel, gifts to family members, and quitting your job. Once you’ve brainstormed everything you want to own and do, rank those items in terms of importance. Here’s how your list should start:

  • Pay taxes
  • Pay off debt
  • Save for retirement
  • Everything else…

3. Determine what is possible after receiving sudden wealth

Before you buy a new house or car and before you quit your job, you need to determine how far your windfall will allow you to go. Give your ranked wish list to your investment advisor to help you calculate what you’ll be able to do without getting into financial trouble down the road.

This is one of the most important steps because you’ll know what you can do and what you can’t. Once you know what you can afford, go the extra step and develop checks and balances. For example, make a commitment with your fiduciary or investment advisor that you will run all purchases by them if they exceed more than a set dollar amount.

4. Monitor your spending

The most important thing you can do in this situation is to monitor your spending. Keeping your financial plan updated helps you notice when you’re starting to get off track. Meeting with your investment advisor and CPA at least once a quarter is a good way to keep your plan up to date.

Here is what you’ll want to keep an eye on every quarter:

  1. Net worth – How much are you worth after paying all of your debts? It’s an important number that needs to be reviewed often. Excessive spending and/or poor investment returns can eat away at your assets and decrease your net worth over time.
  2. Cash flow – This report shows a running tally of your income and expenses. You should be able to see exactly what was earned and what was spent over a period of time. You’ll want to be aware of two situations. First, are you earning less than you projected? Second, are you spending more than you projected? Occasionally earning less or spending more than you thought shouldn’t be an issue, but if it becomes a regular occurrence, you’ll need to make a change.
  3. Investment summary – You should know how your investments performed over the last quarter and you should get an economic/financial update. Again, a quarter of underperformance shouldn’t be a problem but several quarters might be.

Last Thoughts

Whatever the source of the sudden wealth, it’s yours now. Relax, take a deep breath, and follow these 4 simple steps above to help ensure you’re managing sudden wealth correctly.

With Johnson Wealth and Income Management, your wealth team, tax professionals, risk management, estate planning and money management professionals are all under one roof. For more information on our financial advisors and sudden wealth management, contact us here today!

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