Making it and keeping it: Navigating the challenges of overnight wealth

By London & Capital | 13 Oct, 2022

Most people have probably dreamt of sudden wealth. Whether the fortune comes from selling a highly successful business, winning the lottery or receiving a large inheritance from a distant relative, most of us hope for the happiness that overnight wealth might bring. The reality, however, isn’t always so rosy.

An influx of significant wealth comes with many complications. Not only does it change your lifestyle overnight, but it can also take an emotional and psychological toll. The pressures of ensuring it is managed responsibly are high. This is often referred to as sudden wealth syndrome.

People in this situation may have a difficult time adjusting to their newfound wealth and end up feeling stressed and anxious. Others find themselves overspending and making poor financial decisions that, over a period of time, cause even more stress and result in a demoralising reversal of their financial fortunes.

Studies over the years have found that people who suddenly come into large sums of money stand a higher chance of losing most or all of their fortune through splashing out too readily or simple mismanagement. The clear message is that anyone who receives a sudden influx of wealth should take financial planning very seriously.

This view was neatly summarised in an article from FT Wealth, the Financial Times’ wealth supplement, late last year when it delved into the many perils of making a fortune at a young age. Sudden wealth can come through traditionally lucrative occupations such as sport, acting or music, but also from more modern routes such as becoming an influencer, online entrepreneur or cryptocurrency trader. But all of these industries are littered with examples of people who have hit the top then come crashing back down. The avenues to riches are multiplying and evolving, but the perils remain the same.

Whichever way the money is acquired, the best way to avoid the many pitfalls of sudden wealth is to engage an experienced wealth manager. Younger people who need to maintain a steady cash flow through to retirement will need the advice of professionals or they run the risk of their gains diminishing over time.

The emotional turmoil of newfound wealth is often a surprising element of the recipient’s improved financial status. Quite often the reality of the situation is different from what was expected. Some struggle with their new identity or finding a sense of purpose, while others feel burdened by the responsibilities or experience a sense of isolation.

Given that a windfall changes every aspect of your life, it’s worth working with an adviser that not only provides the financial planning you need, but also helps with the emotional aspects. Many advisers recommend leaving the money untouched in the short term so you can take your time and get some perspective. This also allows you to organise yourself, set goals and understand your priorities.

But what should these priorities be for the overnight wealthy?

It may be tempting to stay cash rich, but this strategy can backfire. Uncertain economic conditions and widespread volatility mean your money needs an active investment management strategy to ensure it works for you. Parking cash in a bank account may seem appealing but inflation, particularly problematic in the current environment, will inevitably erode its value. Investing in assets that defend your capital from economic headwinds is essential.

Sudden wealth can also be quickly depleted though overspending. Just because you now have more wealth than before does not mean it is limitless. The money can disappear nearly as quickly as it arrived without an appropriate budgeting strategy. A bulging bank account can easily blind someone to their true means. Better to be realistic early on rather than wait until later when the money has evaporated.

When it comes to the management of new wealth, it is often the more banal elements that are the most important. Most people will think of investments as a priority and that is obviously part of it, but there is much more to consider. A good wealth manager can act as an astute guide when thinking about the wider picture.

Some of the first steps will involve opening new bank and investment accounts to cater for your changed financial needs. You should ensure you have suitable pension and individual savings account (ISA) plans in place. Your adviser may recommend that you write a will, take out appropriate life and health insurance policies, and perhaps even consider setting up trust structures. Additionally, you may now require the services of trusted legal and tax advisers or require sound expertise if you plan to venture into the property market. Your adviser can help connect you to competent and trustworthy professionals.

Ultimately, the objective will be to ensure your wealth serves both your short-term and long-term needs. This may include investing some of your capital into a business venture or a philanthropic endeavour. It could also include a retirement plan that allows you to spend less time working in the future.

At London & Capital, we understand the pressures that sudden wealth can create and are here to help make sure that once you’ve made it, you keep it.

To get in contact with London & Capital, please give us a call on +44 (0) 207 396 3388 or click here.

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