Sudden wealth is a financial situation that is both a blessing and a curse. More money, more problems! In fact, about 70% of people who come into sudden wealth will be broke within a few years of coming into the money, according to a study by the National Endowment for Financial Education.
We are all used to gradual money (i.e. salary, investment dividends, etc.), but we aren’t used to dealing with sudden wealth (i.e. coming into money unexpectedly). Sudden wealth is when a large amount of money finds us that we weren’t expecting.
Read this article to learn more about how to turn extra money coming your way into long-term financial gain.
Sudden Wealth Comes in Many Forms
Sudden wealth won’t look the same for all of us, and we’re certainly not guaranteed sudden wealth at any point in our life. So, don’t bank on it happening; however, beyond winning the lottery there are a number of ways that a person can come into sudden wealth.
Inheritance is likely the most common cause of sudden wealth, but there are other times, maybe to a lesser extent, that we can treat as turning points if we choose to. Receipt of stimulus funds, tax refunds, increase in pay, and potentially even investment returns, are all additional examples.
Sudden Wealth isn’t Tied to a Specific Number
Just as there are different ways for sudden wealth to happen, there is no threshold that defines the term. Most of us think of sudden wealth as a life changing amount that is in the hundreds of thousands or millions.
However, I would argue that sudden wealth is more about coming into any amount of money that is not a standard cash flow. How we use money that isn’t expected can really allow us to get ahead or we can squander it.
For instance, we enjoy watching Wheel of Fortune every now and again. My husband and I are competitive, so we see who can guess the puzzles the quickest. Every show it seems there are individuals that walk away with three-five thousand dollars and then there is one that walks away with fifteen or twenty thousand dollars or up to forty or sixty thousand, if they get the final puzzle right.
All of those people, not just the final puzzle winner have come into sudden wealth. Three thousand dollars may not be life changing in the sense that no one is resigning from their day job over that; however, that amount can either be squandered away on disposable goods that will last a couple of years. Or, it can help pay down debt faster, be saved to increase emergency savings, or could be put towards retirement to grow for years. This is what sudden wealth is about – using the money to grow wealth instead of being squandered away.
What to do if You Come into Sudden Wealth
Sudden wealth can happen at any point in life. It can be a pivotal moment that causes a large financial shift. However, focusing on the big picture and what you want most is critical. Otherwise, it can be squandered away never to be seen again.
Take Time to Process
In the small town I grew up in, it was announced that someone had won a huge lottery, but the person didn’t come forward right away. I remember being at a small get together with a few of my peers and our moms.
We were all talking about it and how we would have handled it if it was us. One mom in the room said I would gather only my immediate family and legal counsel that I trust before making any decisions. She said they would lay low and not tell a soul. They would lay low and take time to be methodical about how they handled things. She was clear her purpose was to get her ducks in a row.
Sudden wealth can cause a lot of emotion or be caused from an emotional situation (i.e. the loss of a loved one). It’s important to take some time to breathe and process before making any life-changing decisions that you can’t undo.
Don’t be Afraid to Say No – In Fact, Get Comfortable Saying No
From the get-go of coming into sudden wealth, it’s important to say no. Once money is involved, people start coming out of the woodwork. Keep the changes in your financial situation close and don’t be afraid to say no to the family members, financial professionals, etc. that clearly are looking for a piece of the pie (no matter what size it is).
Don’t use your wealth to create wealth for someone else, unless it is beneficial to you, too.
Minimize “Spendy” Behavior
We only get the chance to spend the money once. Using sudden wealth to buy things means we don’t have the opportunity to spend that money to pay down debt or to save and let grow.
Coming into money somehow puts a hole in our pocket. We are more likely to overspend on lower-ticket items and not large ticket items. If you start spending $50 here and $100 there, and so does your significant other, that $3,000 from Wheel of Fortune can be gone pretty quickly.
So, if you want to reward yourself with something now, be strategic. Buy one thing (within a reasonable price) and then use the rest to save.
A great example of doing this I got from an old coworker/great friend. She received a nice raise at work, so she wanted to buy herself a nicer tote bag to carry for work. She limited herself to using the difference in one paycheck before and after (about $200) to buy a bag. After that one purchase, she and her spouse chose to put the $200 each paycheck to growing wealth. They alternated paying down debt and saving for retirement. all of the additional funds went to pay down debt and build her retirement savings.
Think About Long Term Effects
When coming into sudden wealth, it’s easy to think about the here and now. It’s hard to think about the long-term effects, such as tax. When we get money, we probably aren’t having to pay tax on it right at the moment, but if there is no tax withheld there will be tax due come April. If tax is withheld, it’s important to do some digging or work with a qualified person to determine if what was withheld was adequate.
For instance, those individuals who win at Wheel of Fortune have to pay tax on those winnings. The recent WallStreetBets people who actually made money off of their trading activity, are going to have to pay tax. They’re most likely going to have to pay short-term capital gains, which means they’ll have to pay ordinary income tax rates on their earnings (unless they happened to be in the stock over a year before selling). I worry that some of the people who have posted they were able to pay off their house or their student loans don’t realize that come next April, they’re going to owe a lot of tax.
It’s important to think about this, because getting into a situation where emergency funds or liquidating assets is needed to pay Uncle Sam can create a long-standing problem. If you put all of the money into a qualified retirement account, then you have to access the money to pay tax (I would argue to look elsewhere first!). Accessing money in a retirement account before 59 and a half will result in tax on gains and also a penalty tax for taking money out of the account. The result, even more money for Uncle Sam.
Prioritize How to Use the Money
Now that you know some things to think about in order to protect the money you’ve come into through sudden wealth, it’s time to have some fun putting the money to best use. There are a few things to think about.
First, do you want to preserve the capital (i.e. never or only spend little of the funds that you received) or are you ok with spending some to pay down debt. If you want to preserve the capital, you’ll need to invest the money in some instrument to protect your purchasing power over time. MPower Co has this article on investing for beginners. Start there.
Then if paying down debt or investing, you’ll want to prioritize where you’re putting the money (i.e. emergency savings vs retirement fund, or which debt to put the money towards). Using a framework built on what you want most, not what you want now, is critical. This is how you get ahead and make sure you realize your goals.
Take a Financial Education Course
If you’re reading this article because you’ve come into sudden wealth (especially a significant amount), you have a lot more to lose. Financial education is important for everyone, and it is important for those that want to grow and protect wealth. Even if you are working with people you trust, it’s important to know what they are telling you is good advice.
If you’re not sure what it is you want most, how to prioritize which debt to pay down, or where to save and invest money, taking Richer Retirement is a must. Richer Retirement is MPower Co’s online course that is authored and instructed by Dr. Thia Crawford. This is a financial course that will empower you to make good financial choices now that will last us up and through your golden years. Learn more about Richer Retirement here.
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If you liked this article on how to handle sudden wealth, you’ll like our free resource on becoming a millionaire next door. Becoming a Millionaire Next Door takes focus and time and using money wisely, whether it be from sudden wealth situations or not. Click on this link to get your free download.
