Your prayers have been answered; the proverbial rainbow has provided … so now what?
Believe it or not, sudden wealth can create a huge headache. So before you collect the pot of gold from the end of the rainbow or win the lottery, read this …
When Apple Peachblossoms was 21 her father called her into his office, where his lawyer asked Apple to sign some papers. Apple’s father had just purchased some mobile engineering workshops for $350,000 that provided services to the Central Queensland mining sector, and he had decided to make his two daughters major shareholders. It wasn’t his intention for Apple to take an active role in running the business. Apple spent the next few years building up her graphic design and multimedia business and raising 3 children with her husband, Lionel, a Fresh Produce Exporter. Then, just a week before Apple Peachblossoms 34th birthday in June, her father announced he finalised a purchaser for the engineering business prepared to pay $23 million. Apple and her sister, Vanilla, received $7.5 million each. The engineering business had adapted specialised technology, techniques and processes with global application.
Almost immediately, the Peachblossoms upgraded their comfortable family home in Struggle Street, Rockhampton to more palatial surroundings with island views on the Capricorn Coast. A new cabin cruiser and luxurious vehicle more than capable of towing it was soon delivered to their new driveway. (Naturally, to protect their privacy, names and occupations have been changed). Things are good - but not as good as you might expect.
The Peachblossoms are finding they are missing the homeliness of their old subdivision, where they BBQ’d with friends and watched children of the neighbourhood play together. Apple hasn’t even told her former neighbours how much she’s worth or where the money came from. She worries how they would react to their sudden unearned riches. “That’s our biggest concern. We don’t feel comfortable with our money or new home yet. It really feels like we’re in someone else’s house. From the beginning we’ve been thinking, ‘How can we have this money and hide it at the same time? How can we live the life we were living and keep the friendships, yet still be able to do the nice things having this money will allow us to do?’”
Yes, believe it or not, being delivered sudden wealth can be a problem. That’s not to deny most of us would be happy to take on the burden if a few million dollars was dropped in our laps. But sudden wealth is commonly not the main road to satisfaction it appears to be.
Such a windfall can strain relationships with family and friends. Inexperience with wealth can also make the newly well-to-do easy prey for scams. And don’t even think about looking for sympathy … not a soul in the world will feel sorry for you if you blow it … as many recipients of sudden wealth are prone to do.
Part of the problem is unfamiliarity with money. It’s not exactly easy to go from a pauper to a prince … as many Hollywood movies have shown. Your last impulse buy was probably no more than a couple of hundred dollars; now you can stroll into a luxury car dealer knowing you buy anything on the premises and can pay in cash. You feel like all the shackles restricting your impulses have been released, you think “I can do anything, but if I do, will it make me happy?”
Many clients who inherit large sums of money can’t bring themselves to think of the money as theirs. As a result, these people often make decisions less on logical rationale and more on clouded emotion. Some beneficiaries of deceased estates have a sense of their money belonging to the person that bequeathed it, even for many years later. “It was Dad’s money; I have to do something with it that was important to him”. Sometimes the beneficiary feels they didn’t deserve the money; there is a work ethic that says if you didn’t earn it yourself then you should feel guilty.
Apple Peachblossoms, whose family was never wealthy before her dad’s plans of external succession within the engineering business came to fruition, admits to feeling some of this guilt. “When you come from a hard working family, that’s what you know how to do: work hard and keep your nose clean. Now all of a sudden you have all of this money and you don’t need to work hard. Do you deserve what you have?” The Peachblossoms are already fretting about the potential effect of their windfall on their 9 year old daughter and twin 7 year old boys. The little cherubs have no idea that they will grow up without financial worry - and so far Apple and Lionel plan to keep it that way.
Lionel and Apple’s silence may well be golden, since sudden wealth has a nasty habit of converting families into warring armies. One common problem exists when parents cash in by selling the business they’ve spent half a lifetime building, and then decide to give their adult children different amounts of the resulting profit. Parents in such a situation may be trying to be fair by giving less successful kids more money than their prosperous siblings. Trouble is that the siblings who get short changed rarely agree with the assessment made. They may view money as love and feel their parents have favoured a sibling over them.
So, if you wake up to find yourself worth substantially more, what should you do? Here’s a few tips gathered from many experts’ experiences.
- Blow some of it: It’s natural and healthy to feel euphoric after coming into a large amount of money. Perhaps limit your indulgence to no more than 5% of your windfall. Spending money is fun and can be like a narcotic, getting used to the thrill of overspending is more dangerous than anything else.
- Sit on the rest: Once you’ve had some reckless spending, pay off any personal loans or credit card debts you may have, but don’t retire your mortgage until you are sure of future living arrangements. Don’t sell your house in the first year and buy a bigger one; don’t give away any money to friends and family; give yourself time for reflection before making any major decisions.
- Get professional Help: Wealthy people need professionals to provide further assistance to create, protect and ensure future succession of their new wealth. While it is important to have an advisor (or counsel of advisors) whose technical abilities you respect, it will prove far more important to have an advisor whom you trust - literally with your families financial life. Do not care what they know, until you know they care.
- Determine your long term goals: One of the important things professional help can do is to aid you in articulating your plans for the future. Do you want to retire or work less? Buy your kids a house, or get them through school? Help family members? Do you want newly acquired funds to last your lifetime or be there for future generations? The people who are most successful at this are the ones who are willing to take the time to think about what’s important to them.
- Revisit your plan regularly: Your personal and financial situation is going to change as you go through life, and it’s important to adjust your plans accordingly. There’s nothing wrong with wanting to indulge yourself, but its important to go through your full spectrum of goals and objectives not just for next year, or five years from now, but 20 and 30 years away and to do so regularly.
About a quarter of people who suddenly become wealthy will blow their windfalls, regardless of the advice received. For many others, sudden wealth means loads of stress. But before you get too discouraged, let’s admit it - there are many cases in which sudden wealth truly has delivered long term happiness to the lucky people who have received the cash. Especially if you keep your expectations reasonable, and put emphasis on maintaining ties to friends and family, sudden wealth can be a godsend.
Where to from here?