What would you do if you suddenly inherited, won, or earned more money than you ever dreamed of? Some people say they’d make sure their loved ones lived comfortably for the rest of their lives, some would fill their driveway with fancy cars, and others envision traveling the world.

What is Sudden Wealth Syndrome?

The fact is that many people who experience such a windfall also experience anxiety, feel confused about whom to trust and what to do next, and may spend recklessly. This is all part of a phenomenon known as sudden wealth syndrome. When someone gains a large (and often unexpected) amount of money from an inheritance, lottery win, lawsuit, earnings on something they created, or some other circumstance, they may be suddenly plagued with worries that they’ll lose the money or that people will treat them differently because of it.

What Effects Can Unexpected Wealth Have on Someone’s Finances?

If you’re not used to wealth, you may not know how to manage it immediately – especially without proper support. Lottery winners, for example, may be more likely to file for bankruptcy than their non-winning counterparts. A 2010 Review of Economics and Statistics study of Florida lottery winners found their bankruptcy rate was nearly twice as high as non-winning Florida residents.

A 2012 Journal of Family and Economic Issues study found that younger people – those in their 20s, 30s, and 40s – who benefit from an inheritance only save about half of their surprise wealth, spending the rest or losing it through questionable investments.

When it comes to sudden wealth achieved through short-term income, the outlook isn’t much better. In 2015, a paper in the American Economic Review found that 15% of NFL players drafted in the late 1990s and early 2000s had filed for bankruptcy within 12 years of leaving the league – despite having six-year career earnings that topped most people’s lifetime earnings.

So, How Can You Protect Your Wealth?

You’ll need to protect your money and your mental health as you begin to navigate this sudden windfall. Knowing what to do at the start of this journey will help set you up for stability.

1. Keep it Quiet. You don’t want to be inundated with unsolicited financial advice or requests for funds from people you know, so try to share the news of your new wealth only with a few people you know and trust completely. Depending on the amount you’ve won, earned, or inherited, oversharing can put you at risk of everything from unwelcome attention from estranged family members to lawsuits or threats, so be discrete.
2. Take Your Time. Pause before making major purchases. Take time to understand exactly how much money you have, plan for its protection, and set some priorities for spending.
3. Consider Tax Liabilities. Lottery winnings or unexpected earnings will be taxed as income and can push you into a higher tax bracket. Inheritances are not considered income, but you may owe federal and state estate tax. Figuring out your tax liability – and ensuring you don’t pay too little or too much – can be complicated. Work with a qualified tax professional – like a certified public accountant, tax attorney, or enrolled agent – when you begin managing your own money.
4. Try Not to Overspend. Do you typically tend to overspend? Many people, from lottery winners to athletes and celebrities, find themselves in a financial bind by spending their money too quickly and without much long-term consideration. Work with a trusted financial advisor to find safe spaces to invest your funds, like educational savings plans for your kids, retirement funds for yourself, or a house you really love. It’s alright to treat yourself to that long-desired trip to Europe, or a new car, perhaps, but it’s smart to plan sensibly for how you’ll spend the rest.
5. Plan for the Future. Work with a wealth management professional to adjust your short- and long-term goals – and add new ones – in light of your new wealth. An experienced financial professional can guide you in planning philanthropic endeavors – including those that will reduce your tax liabilities – investing wisely, managing risk, planning for the protection and eventual distribution of your estate, and saving for a comfortable retirement, among other goals.

Remember to Look Out for Your Mental and Emotional Health

Give yourself time to process any feelings associated with the windfall, which may include shock, excitement, uncertainty, anxiety, and even guilt or sadness, especially if the wealth was the result of a loved one’s passing.

You may feel shocked or in a state of disbelief that the money really belongs to you. You may feel uncertain about your power to make smart financial decisions. Or you may feel guilt and sadness because you don’t think you deserve the money more than others around you.

Taking time to process your situation and these emotions, rather than launching into an “I’m rich” mentality, will help you make clearer, more informed financial decisions that align with your goals and ultimately reduce your anxiety.

Consulting a therapist is never a bad idea either, as they may be better able to guide you through the possible emotional implications of your financial moves and advise you on how to deal with people in your life who may not have your best interests in mind.

Worried About How Your Relationships May Change?

The unfortunate fact is that some people in your life will treat you differently if you suddenly experience financial good fortune. These reactions can range from resentment to sudden false affection or over-the-top friendliness associated with greed. While some of these perceptions of people changing are real, people plagued by sudden wealth syndrome may also become suspicious of people in their lives when it’s not warranted, spurred by the anxiety and uncertainty they are already experiencing.

Friends and loved ones may not be able to join in on the activities you now have the freedom to partake in, which could lead to guilt and feelings of isolation. You may also feel uncomfortable in the company of people with similar levels of wealth since you experienced yours so quickly.

Protect the relationships that matter to you, along with your money. Make efforts to stay connected to your loved ones and friends. Keep up with the weekly or monthly meetups you’ve always had, continue to show interest in their lives and families, and try to keep each others’ financial limits in mind when making plans. Treat the ones you love – and who love you back – as long as they’re open to the gift. Avoid making friends and loved ones feel forced into expensive activities, even if you’re comfortable footing the bill.

Don’t Let Sudden Wealth Syndrome Disrupt Your Life

If you use discretion, take your time, talk to people you trust to have the expertise to help you manage your money and its emotional effects, maintain your genuine relationships, and focus on the future – you can likely sidestep sudden wealth syndrome and be well on your way to financial wellness.

Feeling overwhelmed and confused with what to do with your new wealth? Contact one of our Wealth Management Advisors today!