How to Keep Sudden Wealth in 9 Steps

Sudden wealth can come from many places: the lottery, an inheritance, winning a lawsuit, a divorce, an investment, selling a business, having a successful career and other ways. While it’s a very pleasant fantasy for many, the reality may be completely different!

This statistic is what is important to understand:

“Instead of finding themselves in the lap of luxury, 70% of people who come into sudden money are broke within a few years,” according to the National Endowment for Financial Education. Seventy percent!

You may be thinking your sudden wealth will mean you can have fun shopping, buying new homes and cars, traveling, and you’re right, you can. But that is the mindset that can start you on the road to financial disaster.

The first thing you want to do is relax and celebrate your good fortune. Express your gratitude and be happy you are blessed financially.

It’s a good idea to take a deep breath, relax and think about the life you want to create, so you can create a plan.

The typical thing that lottery winners do is call their friends and relatives, go to the mall, go to the car dealership and start looking at houses. That is NOT what you want to do!

Let me ask you a question – what is your goal for the money? Do you want to continue to have this money at the end of your life OR do you want to have a good time for a little while and blow it all?

Because if the latter is your answer, you’ve just started yourself on that path to spending and it is spending that will lead to running out of money at some point. I don’t care how much money you start with.

Don’t believe me?

Even a divorcee who inherited over a billion dollars, spent and invested poorly, and went bankrupt! After Patricia Kluge divorced the richest man in America, and received $1 billion, she invested in a winery, which she had no experience in, and spent frivolously. Her fortune was lost over a period of 21 years of mismanagement. She blamed it on the economy.

Although it might seem impossible to spend a billion dollars, let’s think about how fast you could spend the money. First of all there are taxes that have to be paid and people forget to calculate that in. They also forget that assets cost more than just the purchase price, there are ongoing expenses, insurance, maintenance, and repairs. When you buy multiple homes, you need people to look after them when you’re not there. You need staff to work at them, whether a mansion or a yacht. Pretty soon you have 5 houses and 55 staff on payroll for maintaining everything. You have to manage all those people. It’s a full time job. The list of expenses goes on and on until one day you wake up and there’s no more money left to spend. IT’S ALL SPENT!

Ok, let’s go back and start over. You need a plan. Your plan is going to start with the end in mind.

Step 1 – Ask yourself, how much money do you want to have when you die?

That’s where you start. If you don’t plan for how much money you want at the end, you won’t have it. It won’t…just…happen. You have to prepare and execute a plan.

Let’s say you inherited $20 million. If your goal is to still have $20 million or more when you die to pass to the next generation, then there are specific actions you must take.

You must have the mindset of an investor and not a spender. Getting your mindset right is super important. You want to have the mindset that you are a steward of your money, not that this is some blank check to fund an unlimited and never-ending shopping spree.

You need to assemble your financial team. Your team will consist of an attorney, an accountant, a realtor and at least one financial advisor, if not more.

You will want to check their backgrounds or get a good referral from someone else who has wealth. Check their reputations with multiple sources. Check on the attorneys with other attorneys. Check on the financial advisors with other financial advisors. Ask the attorney for the name of a financial advisor and financial advisors for the names of attorneys. They often know of each other.

Step 2 is to pay your taxes. Consult with your accountant to pay your taxes promptly and make any plans for future years, such as if you sold a business and are being paid in installments. Plan to set aside money for the future payments.

Step 3 is don’t tell ANYONE (except your spouse) about the money you have! Don’t ever say HOW MUCH you received. People talk and word travels fast. People you don’t even know will end up gossiping about your new fortune. The unfortunate thing is some friends or relatives will believe that your money is also their money to spend. IF they know how much money you have, they may pressure you to buy things for them or make you feel guilty if you don’t share it with them. I’m sure you will be generous, that’s not the issue. It’s no one’s money but yours to decide what to do with. 

You want to be cautious talking about your new found wealth. It’s tempting to show wealth – that’s how the nouveau riche got a bad rap, by showing it all by driving Ferraris and being very flashy. Old money doesn’t have to prove they have it, and they’re used to having it for generations, so they put their money into assets rather than flashy things. With your new wealth, if you make the right decisions, you will be able to steward money for generations in your family if you choose to. Your future generations can say they come from “old money.”

Step 4 is to meet with your attorney and create a new will. If, God forbid, you were hit by a bus the day after you received your wealth, your existing will determines who receives your fortune. If you have no will, state laws will determine which family members will receive it. Without a will, fortunes can be tied up in court and disputed for years, dwindling the corpus. The lawyers can end up with more than the beneficiaries. 

Step 5 is allocate 5% to spend. Take 5% and make a list of what you’d like to spend the money on. Take a good look at the list and consider the insurance, maintenance, repairs, staff and other items it may entail. Give a lot of thought to what you want to buy so you don’t become an impulsive spender of items that don’t have any priority to you. Give yourself the gift of time to think, meditate, walk around and pause in a relaxing way before you make any major decisions.

Implement your spending plan after giving it good thought. If you want to fly by private plane, it is likely smarter to get a Net Jets Marquis card for $250,000 instead of becoming the owner of a $5 to $50 million plane, which will cost a lot to maintain, staff and will depreciate in value. It is much more difficult to sell a used plane, since rich people want to buy new, so understand purchasing a plane, or expensive car, will often result in an almost total loss over the long-term.

Create a file for things you plan to spend large amounts of money. Plan to spend your 5% by saving items in a file, either online or physically. Live with it for a few weeks and see if you still want these things. 

Step 6 is to research, don’t just pay retail. If you are buying a new home, don’t just offer the full price because you can afford to. Be savvy and negotiate. Look for deals. The wealthy almost never pay retail and cash is king when negotiating.

Step 7 is to work with your financial advisors to diversify and invest 95% of the money. I encourage you to consider cycles before you make any investments. What investments are high priced right now and have less potential to appreciate? Which investments are low right now and have a lot of potential to appreciate? What is the right mix or asset allocation of assets so you are not overly invested in one asset class ie. you don’t want to have everything in stock, bonds, or real estate. Diversify to protect your wealth (Step 6 of the 6 Steps to Wealth). Of course you want to pay off debt and not take on new debt, but you already knew that.

Step 8 is to consider setting up a donor-advised fund for charitable giving. This is a lot less expensive and requires no administration like a charitable foundation does, yet you get all the tax benefits. A donor-advised fund may also save you capital gains taxes, depending on how you became wealthy. Let’s say your wealth came from highly appreciated stock. You have a cost basis of $1,000,000 and it’s now worth $10 million. You may be able to donate some stock to your donor-advised fund, they will sell the stock and you won’t have to pay any capital gains tax on the gain. You get money in your charitable account to give away tax-free and when you make gifts, you are making a charitable donation so you get a tax deduction for the amount you put into the account. It’s a very powerful strategy. Fidelity investments offers donor-advised funds with a minimum deposit of $10,000. You can go online to open an account.

Step 9 is consider buying a large life insurance policy. This can help pay for estate tax that may be due upon your death and/or may provide liquidity for your estate and heirs. It can replace assets that are lost during your lifetime due to economic downturns or poor financial decisions. Your financial advisors can guide you on what amount is best.

In summary, as Einstein said, and I quote loosely, the same thinking that got you here will not be the same thinking that gets you to the next place! 

Be a steward of your money. Plan to have it when you die and follow my 9 steps.

In review, they are:

1. Start with the end in mind, then assemble your financial advisory team.
2. Pay your taxes.
3. Don’t tell anyone about your money.
4. Create a new will.
5. Create a plan to spend 5%.
6. Research before you buy – don’t just pay retail.
7. Invest 95% of the money.
8. Consider a donor-advised fund to give money to charity, avoid paying capital gains tax, and get a tax deduction.
9. Buy an insurance policy.

Your action step to is to create your investment plan and your spending plan for the 5%. Decide what you want to buy, and what your budget is. Having it written on paper or in your wealth journal will be a good way to get started.

There you have it. These 9 steps will help you steward your sudden wealth. Follow these and I know you will remain wealthy and smart!

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