You’ve heard the stories of athletes who file for bankruptcy within just a few years of coming into their seven-figure salaries. Or the lottery winners who are somehow living in a trailer shortly after collecting their prize money. There are situations such as winning, earning, or inheriting a large sum of money that we think solve someone’s money problems, but actually, only cause more issues. It’s devastating when you hear about it. It probably makes you wish you could have been by the person’s side and stopped them from buying that mansion or airplane when what they really needed to do was pay off their debts or open a retirement account.
Any time a major change happens to us in life, it can be difficult to update our habits fast enough to keep up with that change. Meanwhile, our old habits and our new reality don’t mesh. When that’s the case for a financial windfall, the consequences can be dire. And it’s so sad because there’s a sense that a once-in-a-lifetime opportunity to kiss money worries goodbye just slipped away. If you’re fortunate to go from having very little to quite a lot, it’s important to pause, reassess, and plan. We spoke with Patrice Washington (pictured below) about how to be prepared when unexpected money comes your way. Washington is the author of the forthcoming book Redefine Wealth for Yourself: How to Stop Chasing Money and Finally Live Your Life’s Purpose.
Adjust your mindset
“How you spend $100 is likely how you’ll spend a million dollars. Now you have more access to make greater mistakes. But the way you behave with the money is going to be the same,” says Washington. That’s why she says that adjusting your mindset if you already know you aren’t disciplined is crucial when your financial situation changes suddenly.
Get a team together
Washington says people can assume they’ll be fine managing a new, large sum of money on their own. But, she says, “They don’t have an understanding for what taxes should look like, what strategies help them hold onto money, or what types of vehicles could be advantageous based on their entire financial picture.” Shifting mindset all alone isn’t easy, says Washington, which is why you need a team of experts to support you.
What does that team look like?
A CPA, a financial planner, and an attorney are a good start for your money management team, according to Washington. While she wishes someone’s first answer to, “What would you do with a million dollars?” would be “Handle my taxes,” she says it’s usually something like “I’ll buy a house” or “I’ll buy a car.” Sometimes those who come into a lot of money jump to buy things for their loved ones. But a financial team can help them strategize before they start upgrading their lifestyle.
There are many ways to manage your money
“There isn’t one way. There aren’t short and quick answers,” Washington says when it comes to deciding what to do with your new fortune. That’s why you need someone to help you. An expert is familiar with the road ahead of you. “It’s going to take looking at what you really want and having someone else help you plan for the things you don’t know that you don’t know yet.”
Shop around for a financial planner
When it comes time to choosing a financial planner, “You don’t have to go with the first person you meet,” Washington states. “You can date around. Most will offer free consultations.” She suggests considering how you’d like to be treated. If you want someone who will really hold your hand through this process, find someone willing to do that. She also says that when you find a financial planner, they should have good referrals for other experts like attorneys and CPAs.
Money shaming may occur
Washington discussed some of the social changes to expect after a financial windfall. She brought up financial guilt, and that if you’re the first person in your family to make a lot, you may hear comments like, “You’ve changed” or “Don’t forget I changed your diapers.” Family members may try to make sure you don’t get too big for your britches.
Prepare for financial guilt
Another thing that’s very common, says Washington, is a feeling of “Why me?” or “Why should I deserve to have all of this?” Thoughts like those can cause someone to start unnecessarily giving away their money to friends and family. This is when you might feel that you should pay for a relative’s rent or cover some other cost for a loved one.
Your team can help you give help
It’s important to be wary of those who try to take advantage of you or to be aware if financial guilt is pushing you to make sudden decisions. But when those requests from loved ones start flooding in, “If you have your mindset in check and your financial team, you can say ‘No.’ Or you can do a one-time gift,” Washington states, adding that your financial team can help you determine what you can afford to give out to loved ones. She also suggests preparing a script from which you read when loved ones approach you about money.
It’s hard to believe that someone would willingly ruin their finances, but if it helps them feel a part of the only group they’ve ever known, it can happen, says Washington. “From a psychology standpoint, you want to be accepted and be part of the tribe. If you’re wealthy and the tribe struggles, you will subconsciously create scenarios to put yourself back in struggle.” She says that’s why you often see lottery winners right back where they started, just a few years after winning millions.
Sometimes loved ones won’t just ask for a handout. Maybe they’ll ask for an “investment.” Friends and family often go to someone newly wealthy with their business ideas, asking for an investment. “You don’t have to make decisions then and there,” Washington says. “Don’t say yes out of emotion. Any financial decision should be made with your trusted advisor. You don’t even know the implications from a tax perspective that could bite you in the butt.” If someone is trying to rush you into making a decision about investing in their business, or won’t fully answer all of your questions, walk away. “Anyone asking you to partner or invest should answer every single question. It doesn’t matter how long you’ve known them or what you feel about them,” she adds. “It’s your responsibility to do your best to make logical decisions.”