The perils of sudden wealth

For most people, the prospect of coming into a significant amount of money sounds like a dream come true. Almost everyone has fantasised about what they'd do if they won the lottery. I know I have. Still do, sometimes.

So it's funny to think that there's a school of thought that you shouldn't play the lottery because you might win

What!? 

I'm not sure I'd subscribe to that philosophy. You wouldn't find me mailing back a winning lottery ticket. But I'd agree that there are perils to finding yourself with sudden wealth. 

I think that the perils aren't limited to winning the lottery. It can relate to the young man or woman who has found success as a sports person or in the fickle world of the entertainment industry. It can relate to someone who has successfully navigated a "liquidity event" in a business venture they started. It can relate to the person who, amidst complicated circumstances, has received the proceeds of a significant insurance policy.  

It's even relevant with people who find themselves earning a significant higher income than they have traditionally been used to, such as a fresh graduate. Certainly, I remember when my wife finished her postgraduate studies and we first found ourselves with a higher income than I probably would have imagined five years before. We didn't go overboard, but we played relatively loose with our money. In the first couple of years we bought a nice car (not a European car, but a new car nonetheless). Then we bought a second car. We went on some very nice holidays. We didn't think too much about money. 

Even in our situation, there was a point where reality hit: we realised we needed to be more careful with our spending if we wanted to meet our long-term financial and lifestyle goals. We're relatively well-educated and versed in financial matters (I'm a financial services lawyer accredited to provide financial advice, for crying out loud!). I can only imagine what things would have been like if the bump in income had been a temporary thing.

However, the experience and implications of sudden wealth are more pronounced in relation to someone winning the lottery, or the sports person who likely has only a short period of time during which they are likely to be at the peak of their earning potential, or the "fresh face" in the entertainment industry who has no idea how their career will progress.

The stories relating to sports professionals and entertainment stars who have fallen from financial grace are legion. It's clear that people in these situations are potentially vulnerable, and require good quality advice and guidance to ensure that they navigate this period of their life so that they can enjoy the remainder of their life in relative security. 

Have I got much to say on this? Certainly, a few things come to mind. 

  • Don't be swayed too much by headline figures. A $500,000 payday might sound great. But immediately, taxes come out. There may be agents or other parties who are entitled to a cut. So from the start, what looks like Ferrari money turns out to be Porsche money or even BMW money.
  • Having good advisers can be massively important. A good heuristic might be, if it's someone you already know, other than in a professional capacity, they're probably not the best person to be providing you with professional advice. The less of an interest they have in the actual strategy you end up pursuing, the better. Consider seeking second or third opinions. 
  • Think of the income not as a bundle of cash, but as a capital sum that generates an income stream. If you spend money from the bundle, that is permanent, and you'll never see it again. (You might have an asset, but chances are that it will take money away from you rather than generate income.) The more capital you can retain, the more income it will generate for you in the future. 
  • If you're thinking of borrowing money to invest - think twice. Then, think a third time. Then, think a few more times about it. If you've managed to achieve sudden wealth, do you really need to risk a lot of it to make even more money? 
  • Make sure NO is in your vocabulary. Use the word often.
  • Remember that you're not necessarily making decisions for yourself. You might already have children. Or you might have children and grandchildren in the future. The decisions you make could have a profound impact on the type of life they have. There will come a time when their welfare will be exceptionally important to you. 
  • If possible, don't let people know about your sudden wealth until you've had the time to process it. For example, my wife and I have agreed that, if we ever had a really significant windfall, we wouldn't tell anyone - not even family or friends - for at least six months, and we wouldn't spend our money in a way that gave anyone clues during this time. You need time to internalise the change in your reality, especially before locking yourself into any long-term decisions or creating possible expectations with your loved ones. (This doesn't mean you shouldn't seek professional advice - by all means, do this at the earliest opportunity.)

Sudden wealth can be a life changer. It can impact you, the people you care about, and even future generations. You owe it to yourself and all of these people, to act as a steward for the money.

Sonnie Bailey

Sonnie is the founder and principal of Fairhaven Wealth.

Before founding Fairhaven Wealth, Sonnie worked in the legal and financial services industries for over a decade.

Sonnie first became involved with financial advice as a specialist financial services lawyer. For many years, he was an “adviser of advisers”, reviewing thousands of advice files prepared by hundreds of financial advisers, and providing feedback in relation to the quality and appropriateness of advice; industry best practice; risk management; and regulatory compliance. He has published work in industry publications and spoken at various financial advice conferences.

Sonnie has also worked with banks, investment management firms, insurers, and derivatives providers.

Sonnie has worked as a private client lawyer, focusing on succession, estate planning and trusts. He ran his own legal firm in Australia before relocating to New Zealand. He has also acted in independent trustee and company director positions.

Sonnie is passionate about helping people achieve their goals and manage the risks to which they are exposed.

He has written extensively on his blog, New Zealand Wealth and Risk, which can be found at www.wealthandrisk.nz.

Sonnie is married to his wonderful wife Chrissy, and has two young children, Ben and Anna.