Receiving something like a substantial inheritance or the proceeds from a sale of a business can be thrilling. However, it is also often problematic, both because of how we deal with it and how it affects those around us.
Psychologist Stephen Goldbart even coined the term “Sudden Wealth Syndrome” to describe the extreme stress that people who come into large sums of money sometimes face. Goldbart noted that people who suddenly become rich can “feel cut off from their friends and family” and “suspicious of investment counsellors”.
Unfortunately, this results in many people feeling more guilt than pleasure from this money. This is why it’s important to be clear-eyed about any windfall, so that you can approach it in a constructive way.
1. Temptation to overspend
Almost inevitably, anyone who has a quick influx of cash wants to spend it. And we often only think about short term benefits.
There are two ways to address this. Firstly, put a plan in place for how to use the money. Set goals that align with your long-term financial plan.
Secondly, do allow yourself to spend some of it. That psychological impulse is powerful, and you should satisfy it so that it doesn’t completely overwhelm your thinking.
2. Tax implications
Depending on where the windfall comes from, you may also have to prepare to pay tax on it. Avoid unexpected tax bills by getting professional advice about what tax you might have to pay and planning accordingly.
3. Family and social pressures
A windfall can often create tension between family and friends. This is even more the case when the money is an inheritance or the proceeds from a sale of a business, where others may feel entitled to some of it.
That’s why it’s a good idea to be discrete and not broadcast your good fortune. But, at the same time, don’t retreat into feeling guilty or shameful about it.
Getting help from a professional can help you to set boundaries, develop clear goals, and plan for how your money will serve you, so that you put yourself in control.
4. Potential for scams
Unfortunately, a sudden windfall can be a magnet for scammers. Be wary of unsolicited phone calls and emails, avoid investments that promise high returns with little risk, and use strong passwords and other security measures to protect your personal information.
5. Emotional impact
Perhaps most significantly, receiving a windfall can be a bewildering experience. Goldbart’s writing about Sudden Wealth Syndrome notes that it produces a range of feelings from feeling guilty about receiving money that you didn’t really earn, to becoming paranoid about losing it.
Take time to process the experience and use it as an opportunity to reflect on your personal values and goals. Getting advice from a therapist can also be helpful in navigating this time.
Have a plan
In essence, the most critical element of managing a financial windfall is to have a clear plan for what to do with it. If you see it as an opportunity to improve your financial situation, whether by paying off debts, investing for the future, or building an emergency fund, it can be a big positive in your life.
A plan gives you a framework from which to make informed decisions and ensure that the money is used in a way that aligns with your goals and values. It can also set out small, actionable steps that help you to not feel overwhelmed and will support your emotional wellbeing.
To discuss managing a financial windfall, speak to us.
Disclaimer: The information provided herein should not be used or relied on as professional advice. No liability can be accepted for any errors or omissions nor for any loss or damage arising from reliance upon any information herein. Always contact your professional adviser for specific and detailed advice.