Effectively managing your money – especially when it comes to large balances – takes diligent planning and strategic movement. We always hear the financial advice for those who spend their entire working lives saving up. Budget your income, save for emergencies, set money aside in retirement accounts, max out your employer match, etc…
But what about when a large amount of money falls in your lap unexpectedly?
Sudden wealth can change your life in an instant. With this windfall comes both opportunities and challenges. It can be hard to understand what the next best steps are when navigating your new unexpected financial standing.
If you’re put in a situation where you’re suddenly wealthy (whether that be from a large inheritance, winning the lottery, selling a business, you name it!) you want to be prepared and know the right steps to take to not only preserve your wealth but to use it to fuel your lifestyle and goals as efficiently as possible.
In this article, we will dive into 7 tips that will help you manage your money in the event of sudden wealth – without the stress of making expensive mistakes!
Find Your Dream Team!
When you find yourself learning how to manage your newfound wealth, the last thing you want to do is navigate the journey alone. You need a team of professionals with experience and expertise that cater to your specific needs.
Why does this matter? Managing a large sum of money involves complex financial, legal, and emotional considerations. Without professional guidance, you risk making costly mistakes.
You want your team to be made up of professionals like a financial advisor, a tax specialist, an attorney(s), and a therapist.
Financial Advisor
Find a trusted financial advisor who can help you with your financial needs. Financial advisors can help with budgeting, managing your investments, and creating a sustainable long-term financial plan. Financial advisors can work with you to allocate your assets to help your sudden wealth sustain and grow over time.
A dependable financial advisor can also assist in understanding the implications of inherited IRAs, optimizing for tax benefits, and ensuring that your investment portfolio is diversified to mitigate risks. Financial advisors are an amazing resource for comprehensive financial planning while managing your windfall.
Tax Specialist
Hire a CPA to navigate tax implications, including estate tax and strategies for inherited IRAs, to minimize liabilities. Tax planning becomes more intricate with sudden wealth, you don’t want to end up with a much larger liability than necessary. You are the one who hit the jackpot, you don’t want to split it with the IRS if you don’t have to.
A Certified Public Accountant (or CPA) can help you manage capital gains taxes and income taxes. They can help you understand the benefits of the step-up in basis for inherited assets, which can significantly reduce capital gains tax when you sell those assets. A tax specialist can devise strategies to minimize your overall tax liability, allowing you to keep more of your wealth to grow over time.
Attorney
Your dream team MUST include an attorney or a team of attorneys who specialize or have significant experience with sudden wealth advice. An attorney plays a crucial role in estate planning and asset protection. They can help set up living trusts to manage your assets effectively and ensure they are distributed according to your wishes upon your death.
Attorneys can also help in minimizing estate taxes and avoiding probate, ensuring that your heirs receive their inheritance smoothly. Having a trusted attorney can also protect you from legal disputes and potential fraud, helping to safeguard your newfound wealth.
Therapist
This one sometimes goes overlooked, but having a therapist to help support you as you navigate your sudden wealth journey is a necessity. Sudden wealth can bring significant psychological changes, leading to stress, isolation, or guilt—commonly referred to as Sudden Wealth Syndrome. A therapist specializing in money psychology can help you navigate these emotional challenges, and give you tools for handling relationships with friends and family during this time.
Develop a Comprehensive Financial Plan
Developing a comprehensive financial plan is non-negotiable when you find yourself receiving a large amount of money unexpectedly. A comprehensive financial plan provides you with a roadmap for your financial future. We recommend working with a CERTIFIED FINANCIAL PLANNER® (CFP®) to ensure that your financial plan is comprehensive.
Three steps to comprehensive financial planning are:
- Set goals. Decide what your short-term and long-term goals are, making sure to include the effect of taxes and estate planning needs.
- Create a budget. Create a budget that balances your financial goals with your lifestyle. While you may be able to budget for some more luxurious expenses than before, it is still essential to have a budget in place when managing a large sum of money.
- Create an investment strategy. Have a system in place that allows you to diversify your assets, rebalance when needed, and aim to reduce capital gains taxes.
- Make adjustments as necessary. You can’t just create a strategy and move on when it comes to your financial plan. You need to have a plan that incorporates analyzing and managing your financial plan over time.
Learn, Learn, Learn
Educating yourself on financial literacy can be a game-changing tip if you find yourself managing sudden money. There are significant challenges that come with having access to more money than you’ve had before, so now is the best time to understand financial principles including financial management, investing, and tax planning.
Reading books, listening to podcasts, meeting with advisors, and keeping up to date with financial news and market trends are great ways to build your financial literacy. Educating yourself on these topics helps you understand complex financial concepts and make better decisions.
Don’t Blow It!
Now more than ever it’s key to avoid excessive spending. It might feel like a carrot being dangled in front of you, having access to all of this money and being able to afford the things that you previously never dreamed of, but you must resist the temptation to go all in.
Sure, you can afford a few more luxuries than previously, but money can be much easier to spend than to make back – and it goes fast! Being cautious with your spending is VITAL.
When managing your spending, you want to resist impulsive purchases. If you didn’t want to buy it previously, it might not be the most important purchase now. Take some time to think over your decisions before actually buying something to allow space for you to consider the pros and cons. You must prioritize your long-term goals over a quick purchase that may not be necessary.
Now, we’re not saying you shouldn’t spend any money on your wants. We believe in balancing your money with the rest of your life and indulging in things that are important to you, we just want to make sure you are doing so wisely. Decide what is important to you and allocate for those things in your financial plan.
Be Firm with Family and Friends
Sudden wealth can cause a massive strain on your relationships with friends and family. Some people in your life may feel entitled to your money or have expectations of things you should be doing for them now that you have access to more money. Setting clear boundaries is important, not only for your financial well-being but also for the sake of your relationships.
Now more than ever, it’s important to communicate clearly with friends and family. While you don’t want to be broadcasting dollar signs to the world, you want to be transparent about your intentions and limits with your loved ones. This allows the people in your life to adjust their expectations.
You must be careful and limit the number of people who know about your financial windfall to reduce unsolicited financial advice and requests for money. It could be helpful to create a formal process for requesting money, preferably one that requires people to go through your financial advisor as a mediator. This allows decisions to be made objectively while limiting the amount of on-the-fly cash grabs.
Plan for the Future
Now that you have this sudden wealth, you want to manage it as effectively as possible so that you can remain wealthy. It can be easy to go on a spending spree as soon as you see the 6,7, or even 8 digits in your name, but you want to have a plan in place for your future so that you can retain as much of this wealth as possible.
Planning for the future ensures that your wealth benefits not just you, but the generations to follow. Effective estate planning in place and long-term financial planning are huge assets when you find yourself suddenly wealthy.
Your financial plan must include retirement planning. You need to accommodate your lifestyle while considering the effects of inflation and potential healthcare costs. Working with your advisor to have a plan in place for your retirement can help to ensure your financial security for years to come.
Estate planning is another crucial aspect of long-term planning. Develop a will and trust to manage your assets and provide for your heirs. Estate planning includes creating living trusts, which can help minimize estate taxes and avoid probate. By planning your estate, you ensure that your wealth is distributed according to your wishes and that your heirs are taken care of.
Live a Balanced Lifestyle
Sudden wealth can disrupt your life as you know it. Think about it, you’re waking up one day significantly better off than the day before. Things are going to look different on a day-to-day basis. Your identity and everyday routines can look drastically different than they did before.
Maintaining a balanced lifestyle helps preserve mental and emotional well-being. Sticking to routines that you had prior can help you feel stable and more grounded. There are also resources for support that be an amazing tool for navigating life going forward, like therapists and support groups. This can be especially helpful if you find yourself falling into Sudden Wealth Syndrome.
Prioritizing self-care is equally important when handling identity issues and the psychological effects of sudden wealth. Making sure that your physical and mental health is taken care of through exercise, meditation, and connection with loved ones can help you to take care of yourself while gaining fulfillment from non-financial factors.
Final Thoughts
Sudden wealth can be both amazing and overwhelming. Having access to a significantly increased amount of money is life-changing, so you want to have systems and resources to help you navigate these changes.
Building a team of professionals to support you, creating a financial plan, and investing your time in learning how to manage money and limit spending can make all the difference. It’s equally important to be firm with your friends and family and establish boundaries, plan for the future, and live a balanced lifestyle that provides for your financial and emotional well-being.
We hope that, with these practical tools, you can manage your sudden wealth with much less stress and error.
We don’t want you to feel alone when you find yourself with a newfound abundance. We are here to support you through this journey and provide you with custom-tailored expertise that fits your lifestyle and unique goals.
Not sure how this would work for you? Let’s have a quick chat to see how we can work together to create a plan for you.
