I’m old enough to remember the black and white TV show, The Beverly Hillbillies. Old Jed struck oil when he missed a varmint with his rifle. Next thing you know, Old Jed's a millionaire. Impulsively, he moved his Appalachian clan to Beverly Hills, swimming pools, movies stars. The show was a sitcom about all the hijinks of Sudden Money.
Sudden money is when unexpected assets come into your life. I see it often and it poses a unique set of challenges. Sudden money can be from a positive or negative event.
You might:
- sell your business for much more than you thought
- win your medical malpractice lawsuit
- work for a company that goes public
- inherit a fortune
- receive life insurance when a loved one passes
- win the lottery
- strike oil while hunting
It can and does happen more than you think. And when it happens to you let’s make sure you don’t make these common mistakes.
Mistake: Making big decisions quickly.
Your emotions, positive or negative, are intense when sudden money happens. You just lost a relative or won a lawsuit. You just retired or just signed with the NBA. Sudden money comes with conscious and subconscious issues. It’s easy to be reactive. Rarely, do quick, reactive, emotional decisions work out in the long run. This is THE most critical mistake, because it often creates the other mistakes we’ll discuss.
Solution: Triage and chill. A young couple came by the office after inheriting life-altering assets. They were still choked up talking about the deceased. It had been six months since the funeral. I applauded them for waiting, reflecting and then interviewing different financial, accounting and legal advisors to build a team for the long run. They paid off a few credit cards but for the most part just went about life as usual. The solution is to agree to pause all decision making for a set amount of time. Make it slightly longer than feels comfortable and watch the dust settle and the clarity increase.
Mistake: Acting rich instead of being wealthy.
Social media has taught us to post status updates. Think about that term: status. Just because you have sudden money, do you feel a need to update people on your new status? Rich people act in a way that you know they are rich. Wealthy people hide how rich they actually are. Conspicuous consumption, dopamine chasing and social climbing can wreck your financial plan.
Solution: Choose to live like the wealthy, not the rich. There’s nothing wrong with fancy homes and expensive cars. But when the home is too fancy and the car is too expensive, you’ve lost the plot. Mike Tyson was able to spend over $250 million into bankruptcy because, in his own words, he wanted to show off. Enduring wealth is quiet and self-assured.
Mistake: Being suddenly generous with people and charities
The first two mistakes often lead to this mistake. I once heard where there’s a will there’s a relative. As soon as people or organizations catch wind of your sudden money they can’t help themselves but to reach out for a loan or a donation. They will have compelling emergencies and noble intentions.
Solution: Blame someone else for your stinginess. All the sad stories in the world can wait until you have a plan for gifting and helping others. By the way, loaning money to individuals should be considered a gift or you will lose both the money and the relationship. Generosity can help others but impulsive and unplanned it can wreck your future. Soon you may be the one needing a loan or charity. Tell those who approach you that you have to run it by a third party to create time and space to think.
Mistake: Focusing on assets over income
A million dollars in gold bars or collectors items is great. But it’s hard to use them when you go through the drive through at Taco Bell. (Remember, we still eat Taco Bell because we don’t want to be conspicuous. That’s the problem with some stuff. What you own, owns you. You have to guard your cryptocurrency, real estate, jewelry and 57 Mustang, but does it pay you back for all your hard work. In fact, it may cost money to keep up some inherited or purchased assets.
Solution: Focus on your “paycheck.” Assets appreciate, but if they don’t give you any income or require money to maintain, we have a problem. When you make a plan, focus on having money show up in your bank account consistently and conservatively. That’s the lifeblood of your wealth going forward. That my mean you keep working or it may mean you change your asset allocation.
Okay that's all for now. More insights to come.