What is sudden wealth syndrome?
“Sudden wealth syndrome” is a term used to describe the adjustment issues, stress, confusion, and often money mismanagement that can accompany coming into sudden wealth or a large windfall.
Some examples of a windfall situation that might lead to sudden wealth syndrome are coming into a large inheritance, an initial public offering (IPO) or acquisition event of your company, a major sale (for example of a property) or a big raise or up-front salary for a new job.
A good example of a group of people experiencing what looks like sudden wealth syndrome are professional athletes: the minimum starting salary for an NFL player is $705,000 for 2022.1
According to a report by Sports Illustrated, by the time former NFL players have been retired for two years, 78% of them have gone bankrupt or are under financial stress; within five years of retirement, an estimated 60% of former NBA players are broke.2
Although the challenges of those with a lot of money are inherently different than for most, the approach to a sound financial future remains relatively the same.
Five tips for avoiding sudden wealth syndrome
Here are some tips for those who receive high upfront salaries over relatively short time periods who want to avoid the effects of sudden wealth syndrome, and instead set a foundation for a lifetime of financial security.
1. Educate yourself
It’s hard to be successful at anything in life without understanding what you are doing and why. Personal finance can be overwhelming, and many people don’t know where to start. Consider starting with the basics like budgeting and saving, then move on to investing basics such as understanding the dynamics of risk vs. return and proper diversification. Gaining financial literacy will also help you better assess your true risk tolerance.
Getting a full picture of your finances will help you establish a baseline for setting a budget, creating a debt pay-down schedule and scheduling contributions to retirement accounts. You should understand not only how much money you have in your bank account, but also your net worth, which is a complete picture of all your assets and all your debts. Empower’s free financial dashboard allows you to calculate your net worth in just a few easy steps.
2. Create a financial plan (with help)
For those who receive large sums of money upfront or over a short period of time and need to make it last, it may be a good idea to create a financial plan using financial planning software or online tools. Financial planning tools like Empower’s can help you identify your goals, run intense calculations to project your odds of success and help you stay on track to meet those goals.
You may need your portfolio to support you in future years when you have periods without income, so you will want to stress test your portfolio. Software or tools can help you assess how realistic the goals are and you can even run scenarios for multiple plans to compare projections.
Beyond just retirement, your goals may also include giving to charity or supporting family or friends. This can be a good way to map out if this is feasible and how much “giving” your portfolio can truly support.
3. Maintain discipline
You usually don’t become a professional at something without discipline — and that takes focus. There will be distractions by your surroundings and plenty of misguided influences you will just have to ignore. It may not feel “cool” at the time to be planning for your future when you see others living in extravagance, but your future self will be both proud and grateful.
Let’s keep it real, though. Discipline does not mean deprivation — buying nice things and spending money is okay!
Gauge your own personal spending utility by identifying what gives you the most and least satisfaction regarding discretionary spending and work backward to prioritize. Then take a balanced approach to see where you can allocate toward saving instead of spending now.
There will be plenty of temptations when it comes to fame and sudden wealth, but prioritize your needs to avoid fear of missing out and keep your eye on the prize.
4. Seek guidance from trusted professionals
Assembling a team of trusted professionals who have your best interest ahead of their own can add significant value. Consider consulting and hiring financial, tax, estate and legal professionals.
Make sure your financial advisor is knowledgeable in their field who can serve as your team captain to help appoint other professionals as well. Your team can help you increase your wealth by maximizing your after-tax, risk adjusted return through a holistic approach.
Not all financial professionals are equal, so make sure to fully understand the associated fees, how the person is compensated, any conflict of interest and perform a complete due diligence by vetting their background before moving forward with anyone.
5. Avoid complex investments you don’t understand
Finally, make sure you truly understand the risk and return dynamics of an investment, as well as the costs and the investment’s structure before proceeding. If you have large sums of money to allocate, there is a high likelihood people will present you with opportunities that are presented as what seem like guarantees.
If you see anything promising high returns with little to no risk, run the other direction. This dynamic does not exist without fraud.
If you need help assessing an opportunity, seek the help of your team of professionals. However, it is a good rule of thumb that if you don’t understand the investment, you are better off allocating to more transparent, liquid options you understand.
That is not to say there aren’t good opportunities in the private investment space, but these investments are best suited for sophisticated investors.
If you want to become a more advanced investor, refer to step 1 — education is key!