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Sudden Wealth

September 3, 2012

Financial Planning, Wealth

Your life-time partner dies, you sell your late stage technology start-up to a larger company, you receive a large insurance settlement following an accident, your employer lays you off with a large retirement package. These events all have one thing in common, they are life changing in a significant way.  Your identity, your relationships, your self-image and maybe even your self-esteem, are all likely to be affected in different ways.

It is difficult to predict beforehand exactly how anyone will respond to such events. The same person who handles a crippling accident with dignity and bravery might go to pieces following the death of his or her spouse. Similarly, the sale of a company by an otherwise decisive entrepreneur may leave him or her with feelings of lethargy, loss, regret and loneliness. The former emotions because he or she is in the midst of transitioning from one life stage to another, and the latter because most people are not sympathetic and/or supportive to the stresses caused by the receipt of sudden wealth.  In addition to all the friends and relatives that suddenly emerge from the woodwork asking for help, sudden wealth recipients are often overwhelmed with investment pitches and new business ideas.

It’s important to realize that it is not so much the money itself that needs to be addressed as the new direction your life will take on account of the money.  Most advisors recommend spending some quiet time, where you simply commit to making no major decisions until you have a better awareness of the focus and texture of your life going forward.  Depending on the circumstances this quiet time could last from a few months to a few years. Don’t underestimate how confusing this time can be. Everyone starts out thinking that they know exactly how they would spend a fortune if one came their way but the temptations of extravagant purchases and foolhardy investments can be overwhelming.  Instead, deposit the money in a safe money market vehicle and spend as much time as you need assembling your team. The immediate priority may be working through the emotional issues, particularly in the case of loss, divorce or accident. Find a competent financial planner that can help you understand what the wealth means in terms of your standard of living and the legacy you will leave. Make sure you understand under what circumstances the money will run out i.e. what is the maximum you can afford to spend every year and what type of return, if any, do you need.

Redirect all the investment pitches to your financial planner and if you do lend money to family or friends (usually not a good idea) make sure you have a written agreement specifying how and when the money is to be paid back. Finally, after setting aside money you will need to pay off debts and tax obligations, take up to five percent of your funds and have some fun. You (probably) deserve it.

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“It is commonly observed that a sudden wealth, like a prize drawn in a lottery or a large bequest to a poor family, does not enrich.  They have served no apprenticeship to wealth, and with the rapid wealth come rapid claims which they do not know how to deny, and the treasure is quickly dissipated.”  Ralph Waldo Emerson

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About Malcolm Greenhill

Malcolm Greenhill is President of Sterling Futures, a fee-based financial advisory firm, based in San Francisco. I write about wealth related issues in the broadest sense of the word. When I am not writing, reading, working and spending time with family, I try to spend as much time as possible backpacking in the wilderness.

View all posts by Malcolm Greenhill

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