Here at Lasso, we love to partner with industry experts to bring you the best in finance news and insights. This piece was co-authored by Bozidar Jovanovic of Honey Badger Advisors, LLC.
We’ve all imagined it – that moment you win the lottery, or make it to a pro sports team. Maybe it’s a long-lost great uncle you never knew about who bequeathed his fortune to you. Whatever your daydream entails, you probably have grand plans for how you would spend all that money.
But what happens when that daydream becomes reality? The truth is, many people who face sudden fortune are unprepared to handle that wealth, especially if no one in their family has handled large sums of money before.
A Blessing and a Curse
For those unprepared, sudden wealth isn’t always the dream they imagined. In fact, statistics show that 70% of lottery winners end up broke within five to seven years on average. Furthermore, it’s estimated that about 78% of former NFL players face severe financial difficulties within two years of retirement.
Why is this happening?
The answer is actually multifaceted – from a lack of financial literacy to quickly adjusted lifestyle expectations, sometimes the “shiny objects” are just too tempting. But when cash inflow is limited – such as for one-time lottery winners, heirs and athletes with short career spans – that newly acquired taste for luxury isn’t necessarily sustainable.
7 Tips for Making Your Newfound Wealth Last
At a basic level, making your new wealth last is all about creating consistent cash inflow – how can you use your money to make even more money over a longer period of time?
We’ve got you covered. From hiring a financial advisor to creating legal protections for your assets, we’ve outlined seven steps you can take to make the most of your new money.
1. Be Realistic
It’s easy to see all those zeros and think you’re set up for the rest of your life – not so fast.
Your basic assumption should be that the money you received is the entire amount you’ll get, even if you’re an athlete or gain your wealth from a job. Think about it: one serious injury could permanently end your career (and your paychecks).
Don’t just assume you’ll have more money coming your way until it’s sitting in your bank account. If and when you do receive more, you can always adjust your plan.
2. Explore Every Possibility
Imagine spreading your wealth out over the rest of your life – what kind of lifestyle would that support? Are you happy with that outcome?
Now imagine life throws some unexpected and high-cost curveballs at you, like a medical emergency or a market crash – are you still happy? It’s important to think about the various scenarios that could happen so you can be prepared for anything.
This exercise can also help you make big decisions, like whether to continue working in your chosen profession or switch careers entirely (or stop working – at least for a while). For example, many athletes convert their sports careers into a post-retirement career of commentating, coaching and even advertising.
3. Protect Your Assets
When you have wealth, it’s important to make sure you have all your legal documents in place, such as a will and power of attorney.
It might be worth your while to protect your assets with a trust, especially if you have young children. A trust allows you to gift them money, but it will be managed by a third party until they are old enough to manage it themselves.
Also consider insurance coverage – medical, disability and life. With sizable wealth, one has to consider estate plans, which outline what you would like done with your assets in the event that you pass away or become incapacitated.
4. Don’t Ignore Your Taxes
You definitely don’t want to forget about the tax on your newfound wealth. It will be due on your windfall, and you may even consider moving to a tax-friendlier state in order to save on tax bills from your future investment earnings.
5. Get Rid of All of Your Debt
A big influx of money is the perfect time to pay off your debts. From student loans to mortgages, you’ll end up saving big dough when you eliminate the interest payments on those loans.
If you’re buying a new home, boat or sports car, you should probably pay the entire bill upfront as well.
6. Seek Professional Advice
Most wealthy families have their assets managed by a professional while they focus on earning more or enjoying their lifestyle. This is part of a very old piece of advice: “Exchange time for money.”
There are several options out there, from a fiduciary advisor to legal counsel, or even just an accountant. Explore the possibilities and choose the professional(s) that best fit your needs.
7. Stick to the Plan
The trickiest part of all? Sticking to the plan.
Those luxury vacations are all too tempting, but you don’t want to diminish your nest egg with spur-of-the-moment spending. Once you’ve worked with the pros on a plan for financial success, you need to stick to it.
Unexpected wealth comes with a lot of responsibility, but by staying organized and reaching out to the experts, you can beat the statistics and enjoy your money longer.
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Bozidar Jovanovic, PhD, CFA, is the Founder and Chief Investment Officer at Honey Badger Advisors, LLC. After receiving his PhD in physics from Boston University in 1999, Bozidar spent over 20 years in the finance industry researching and managing investment portfolios. He continues to help individuals, families, and foundations to reach their financial goals.