Sudden wealth strategy
Sudden wealth strategy refers to the approach individuals take to manage an unexpected financial windfall, which often exceeds their usual experience with money. This influx of wealth can arise from various events such as winning the lottery, receiving an inheritance, selling a business, or settling a lawsuit. While the prospect of sudden wealth can be exciting, it often comes with overwhelming feelings and complicated decisions regarding investments, spending, and future planning.
To effectively handle this wealth, recipients are encouraged to follow a structured strategy that involves three key phases: preparation, action, and maintenance. Initially, preparation focuses on anticipating and planning for the wealth before it arrives, during which individuals should seek professional guidance, such as hiring a financial planner. Once the wealth is received, action entails making informed financial decisions based on the previously developed strategy. Finally, maintenance involves monitoring and adjusting the financial plan over time to ensure sustained prosperity.
By implementing a sudden wealth strategy, individuals can navigate the emotional and practical complexities of their new financial status, helping them to secure their wealth for themselves and future generations while avoiding the pitfalls that can lead to financial mismanagement.
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Subject Terms
Sudden wealth strategy
In personal finance, sudden wealth strategy is the method through which an individual manages an unexpected influx of money. The windfall is usually a larger amount than a person is accustomed to handling. An individual can receive sudden wealth through eight windfall events: lottery win, inheritance, business sale, retirement, divorce, lawsuit settlements, stock options, and sports/entertainment contracts.
Sudden wealth can drastically change a person's life. Recipients may be overwhelmed by the financial and legal decisions thrust upon them, and they can make poor choices that result in squandering their windfall. Therefore, sudden wealth recipients are generally advised to formulate a strategy to manage and protect their new fortune. The three phases of managing a windfall are preparation, action, and maintenance. By forming a strategy, sudden wealth recipients can plan for a sustainable lifestyle, future generations, and the fruits of lasting wealth.
Background
When an individual suddenly comes into wealth, the circumstances are accompanied by various emotions. While some windfall events are generally joyous occasions, such as winning the lottery, cashing in stock options, and attaining a sports or entertainment contract, some can be mixed, such as selling a business or retiring. Other events correspond with times of loss, such as an inheritance, a divorce, or a lawsuit settlement.
A lottery win is pure luck. Individuals who win a jackpot may see it as a chance to solve their financial problems. They may want to give money to family members and friends and donate more money to charities. Though the intentions are admirable, such a wish list usually is not practical compared to the size of the winnings.
Employees throughout the corporate world are utilizing stock options as part of their compensation packages. The practice is common at technology firms, where employees are willing to work long hours at low pay to benefit from the growing value of company shares.
The rise from anonymity to fame and fortune can be quick in the sports and entertainment industries. Athletes may achieve a high ranking, win a top event, or sign with a prestigious sports team. Entertainers may find success through movies, television shows, or top-selling albums.
An individual may sell off a business after realizing the proceeds from the sale, including investing the windfall, would amount to much more than the income derived from the business itself. Business owners may have conflicting emotions. They may not be able to pass down the business to another generation, or they may transition into a more profitable industry.
Retirement can be the satisfying culmination of a long career, or it may be brought on early due to illness or a buyout. Many retirees live off managed funds accumulated during their careers, including employee-contributed 401(k) plans and individual retirement accounts (IRAs), as well as employer-contributed pensions.
Individuals may inherit large sums of money from family members upon their death. This sudden wealth is typically accompanied by the grief of losing a loved one.
In a divorce, the couple's assets may be split between both parties, with one receiving a lump sum of cash when the process is complete. The breakup of a marriage is a distressing time, and the individual may be dealing with his or her emotions without wanting to make financial decisions.
Lawsuit settlements are the result of traumatic events, which may leave recipients feeling angry or depressed. Recipients may use payouts to attend to medical expenses, but some give in to indulgences to feel better.
Overview
Sudden wealth recipients are usually overjoyed about their windfalls, but then the reality of dealing with the decisions concerning their newfound affluence sets in. They face numerous challenges in managing the wealth, and choosing incorrectly can lead to financial ruin.
The happy event can take a turn for the worse. Some recipients fall victim to sudden wealth syndrome, the feelings of stress and isolation that surround a windfall. When sudden wealth recipients become overwhelmed in their new status, they may grow paranoid of those around them and spend extravagantly.
To make their fortunes last, recipients are generally advised to formulate a sudden wealth strategy by managing their windfalls in three phases: preparation, action, and maintenance.
Preparation, the first phase, is anticipating and planning for the sudden wealth before receiving it. This phase is when the strategizing process occurs. The recipient considers the decisions he or she wants to make, such as investing or lifestyle changes; however, he or she should make as few decisions as possible until receiving the money. The recipient should take the time to weigh his or her choices, make goals, hire a financial planner, and learn about investing. Financial planners can help the recipient put together a financial plan to attain his or her goals.
Action, the second phase, begins when the recipient receives the sudden wealth. The recipient can now act on the strategy devised during the preparation phase. By working with a financial planner, the recipient makes decisions on whether to purchase a new car and/or home, leave work, or start investing. During this phase, the financial planner advises the recipient in creating a spending plan, an estate plan, a tax strategy, and an investment strategy; making any charitable donations; and protecting his or her assets.
Maintenance, the third and final phase, is monitoring the progress of a recipient's financial decisions and investments year after year. The recipient keeps track of how the sudden wealth strategy plays out. The financial plan is in place, and the investments have been made. The recipient is aware of his or her spending limitations. He or she evaluates his or her financial plan and tweaks it as necessary.
As the whirlwind accompanying the windfall slows down, the recipient can consider making charitable contributions or establishing an estate plan in the third phase if he or she did not do so in the previous phase.
Once a financial plan is in place, sudden wealth recipients can relax and look ahead to the future. They can live according to their means. They can establish a will and other estate planning measures to ensure future generations will benefit from their wealth. Through investments, they can grow their wealth and protect it.
By formulating a sudden wealth strategy, recipients come to terms with their newfound wealth, benefit from creating a financial plan, and avoid running through their fortunes.
Bibliography
Ashton, Janne. The Windfall Club: What to Do When Life Deals You a Good Hand. Eloquent Books, 2010.
Bradley, Susan, C.F.P., and Mary Martin, Ph.D. Sudden Money: Managing a Financial Windfall. John Wiley & Sons, 2000.
Doyen, Robert, and Meg Schneider. Making Millions for Dummies. Wiley Publishing, 2009.
Pagliarini, Robert. "Don't Make These 6 Common Sudden Wealth Mistakes." Forbes, 5 Dec. 5 2013, www.forbes.com/sites/robertpagliarini/2013/12/05/dont-make-these-6-common-sudden-wealth-mistakes/#6733090c4165. Accessed 2 Jan. 2025.
Pagliarini, Robert. The Sudden Wealth Solution. BookBaby, 2015.
Schorsch, Irvin G., III "Too Much, Too Soon: How to Avoid Sudden Wealth Syndrome." The Huffington Post, 6 July 2012, www.huffingtonpost.com/irvin-g-schorsch/sudden-wealth-syndrome‗b‗1652701.html. Accessed 2 Jan. 2025.
“Sudden Wealth: The 6 Things You Must Know About Money That Comes Sudden.” Pacifica Wealth, www.pacificawealth.com/sudden-money-the-6-things-you-must-know-about-sudden-money/. Accessed 2 Jan. 2025.