It’s fair to say most people have probably dreamed of sudden untold wealth. Whether the fortune comes from selling a highly successful business, winning the lottery, or even receiving a large inheritance from a long-lost relative, most of us think of happiness that overnight wealth might bring. The reality, however, isn’t always so rosy.
In fact, a sudden influx of significant wealth comes with several complications. Not only does it change your lifestyle overnight, but it can also take an emotional and psychological toll – and that’s not to mention the pressures of ensuring it is managed responsibly and effectively.
So common is this situation that experts have given it a name: sudden wealth syndrome. People in this situation may have a difficult time adjusting to their newfound wealth and end up feeling stressed and anxious about the responsibility of managing it. Others find themselves overspending and making poor financial decisions that, over a period of time, cause even more stress and put them back to where they started before they received the money.
Various studies have found that people who suddenly come into large sums of money stand a higher chance of losing most or all of their fortune through mismanagement and overspending.
While an article in the Journal of Family and Economic Issues found that people who inherit large amounts of money in their 20s, 30s and 40s lose half of their wealth to spending or bad investments.
The key takeaway from these studies is that anyone who receives a sudden influx of wealth needs careful financial planning from the start. While it is especially important for younger people who need to maintain a steady cash flow from the present day through to retirement, the fact is that everyone in this situation needs an effective wealth manager so that their assets stand the test of time.
Handling the emotions
Not to be discounted is the emotional turmoil that newfound wealth can cause. Each person handles it in a different way, but quite often the reality of the situation is much different from what you may have expected. Some people struggle to understand their new identity or purpose, while others feel burdened by the responsibilities it brings, and some may experience a sense of isolation.
Given that a windfall changes every aspect of your life, it’s worth working with an adviser that can not only provide the financial planning you need, but also help you cope with the emotional aspect of the situation. Many advisers recommend taking time to take stock by parking the money and not doing anything with it until you have your bearings and know where you’re headed. This also allows you to organise yourself, set goals and understand your priorities.
Taking the right steps
So what should you do with your money if you become wealthy overnight? It may be tempting to stay cash rich and forget all about it, but this strategy can have two devastating effects. First, given the current uncertain economic conditions and volatility in the markets means your money needs an active investment management strategy to ensure it works for you. Second, it can be quickly depleted though overspending, particularly if it isn’t generating meaningful investment returns. Therefore, one of the first steps you should take is to find a trusted wealth manager who will understand your circumstances and put together a plan for preserving your capital and growing your wealth.
Managing new wealth involves more than simply putting together a portfolio of investments. There are several matters to consider, such as opening bank accounts to cater for your new financial needs, while also opening investment accounts and maximising pension and individual savings account (ISA) allowances. In addition, your wealth manager may recommend that you write a will, take out appropriate life and health insurance policies, and perhaps even consider setting up trust structures if appropriate.
Ultimately, the objective will be to put you in a position where your wealth serves your present-day needs, as well as your needs long into the future. This may include investing some of your capital into a business venture, a philanthropic endeavour, or perhaps a retirement plan that allows you to spend less time working and more time focusing on your interests.
Mayur Lakhani, Senior Director
Mayur joined London & Capital in 2019 as an Executive Director for the Specialist Wealth Office. Mayur has been a wealth management advisor, investment manager and team lead for over 16 years, providing strategic planning and investment solutions to private clients, trusts and charities.