4 Myths When Managing Sudden Wealth

Myth 1: You Need to Start Making Decisions Right Away

Whether they’re caught up in the emotion of the moment or overwhelmed by new possibilities and responsibilities, some people feel the need to immediately start making plans with their newfound wealth. While there might be some decisions that need to be made right away, such as immediate expenses and where the money should be kept, you might not be in the right frame of mind to make thoughtful, longer-term spending choices.

Do This Instead: Take the Time to Acknowledge Your Feelings

The sudden accumulation of wealth on its own can be a highly emotional moment – even more so if the source of the wealth had resulted from the death of a loved one, a divorce or the sale of a business. The combination of often conflicting emotions – excitement, sorrow, joy, guilt, panic – can make this a precarious time to make life-altering decisions. Before you do anything, slow down and take stock of how you’re feeling.

Myth 2: You No Longer Need to Budget

One of the biggest dangers of sudden wealth is the feeling that you are no longer constrained by sound financial management. The reality is, when you come into wealth unexpectedly and are unprepared for what that entails, there exists a real danger that you could quickly lose it – and more.

Do This Instead: Get Your House in Order

New wealth can be a rare gift. The best way to manage this opportunity is by first re-examining your current financial situation.

• Debts. For many, peace of mind comes from living debt-free. Take stock of what you owe – who the creditor is, how much you owe, what interest rate you’re paying, if there are advantages to keeping an existing debt – and determine if paying off that debt is a good use of this wealth. Remember that not all debt is created equal – depending on your circumstances, you may be better off keeping (for example) a mortgage or a line of credit.
• Monthly expenses. Look through what you’re spending money on every month. Are there any recurring expenses, like a leased car, that you would better off owning? If you’re spending $50 per month to use your local gym’s treadmill, would you be better off buying your own? Some purchases that cost more money upfront can prove to be a better value over the long term.
• Savings. New wealth could provide an opportunity to build up your savings. Remember that if you choose to take on additional expenses (like a more expensive house or car), your emergency fund should increase in kind.
• Goals. A sudden influx of money might cause you to rethink what’s possible and what your future might hold. Having that conversation with your Baird Financial Advisor is crucial so your investments can stay in alignment with your plans.

Importantly, when evaluating your budget, don’t overlook any new expenses that might have accompanied your new wealth. For example, if you inherited wealth from the death of a loved one, you might need to consider probate expenses, or if your wealth is a result of divorce proceedings, you might need to find new living and transportation arrangements.

Myth 3: When You’re Wealthy, Your Problems Go Away

If only that were so. Newfound wealth can often bring about newfound problems. For starters, it will be hard to keep your new wealth a secret, which may make you a target for scams and lawsuits. In addition, while some friends and loved ones will truly want the best for you, you will likely encounter others who will see you as a new source of funds for their own interests – be it the next greatest app or business venture or a GoFundMe account to pay off medical bills. While you may be presented with great or noble causes, you have to be mindful of what you give away. Sudden wealth can even cause marital strife: When your income was more in line with your expenses, there’s little room for debate about spending – with a sudden increase in income, you might find you both aren’t entirely in agreement on your future finances.

Do This Instead: Build a Wall Between Your Wealth and Your Personal Life

Right now, you’re the only thing standing between your wealth and those who would trade on their relationship with you. By bringing in your Baird Financial Advisor, not only do you benefit from a trusted financial professional who already understands your values and priorities, but you’re inserting a buffer who can safeguard both you and your assets. Your advisor can also help protect you from unmerited litigation.

Myth 4: You Can Resume Living Your Life From Before

Understand that even if you have no intention to change your lifestyle, with new wealth, some things will be different. You might now be in a new tax bracket requiring a different approach to tax planning. Your thoughts on charitable giving or your plans to transfer wealth to your kids could require entirely new strategies that didn’t apply previously. Even if your values don’t change, managing your newfound wealth will likely require more nuanced wealth strategies.

Do This Instead: Rely on a Wealth Management Team You Can Trust

Having wealth management professionals with broad capabilities and an understanding of what’s important to you is indispensable. They can not only provide guidance into the more complex aspects of managing newfound wealth, but they can serve as a sounding board and ensure your new financial situation is in line with your plans for the future.

To make sudden wealth work best for you, you need to make prudent, informed decisions. Your Baird Financial Advisor can ensure you’re making the best financial choices for yourself and your loved ones.