Financial Planning For Sudden Wealth
Posted by: Joseph Kuo | June 24, 2021
I recently came across a thought-provoking article about sudden wealth in the Wall Street Journal. In this article, the author talks about how some younger employees and investors are accumulating sudden wealth through IPOs, well-timed market investments, and cryptocurrency.
The article outlines some great recommendations on initial and important steps to take if you’re fortunate enough to have achieved sudden wealth. Although the article profiles a younger age group, its lessons can apply to all of us.
What to Watch Out For After Achieving Sudden Wealth
While there’s joy and excitement in gaining sudden wealth and the choices that wealth brings, there are also many new decisions that have to be made, which can cause some stress.
How soon can I retire?
Can I quit my job and start doing the thing I’ve always dreamed of?
If I quit my job, will I still be able to pay for my kids’ college education?
Even better, can I also buy my dream home and still do all of these things?
In the excitement of watching portfolio numbers go up every day, as if they were scores in a basketball game, we need to be mindful of three things.
Keeping Score Versus Leveraging Your Wealth
The first thing is that we fixate on how high the “score” is and forget about “what can I do now?”.
I used to work at a Silicon Valley tech company where all employees received incentive stock options at a very low exercise price compared to the public price at the time. At work I’d often hear talk about share prices, but very little about what my coworkers actually planned to do with their wealth in the long run. Sure, there were some new cars in the employee parking lot, but that was about it. Invariably, the company had a couple of less-than-expected earnings reports, the share price dropped, and so many of my co-workers missed a prime opportunity to use their wealth as a resource.
The “score” doesn’t matter until you have converted it into something that will tangibly improve your life.
Reacting Versus Planning
Another common thing is that even if we do acknowledge the sudden wealth, we generally get caught up in the technicalities of how to manage taxes and how to preserve or grow that wealth. The WSJ article lists some great recommendations and initial steps, but all of these steps emphasize immediate short-term reactions. Only the last recommendation in the article, “seek advice”, actually addresses the longer term. Many people seek out a financial planner looking for ways to minimize taxes and maximize investment returns, yet don’t give any thought or planning what to do with their wealth.
Doing What Other People Do
The third thing is that we make decisions based on what other people are doing. Our friends buy a large luxury SUV, so we buy a large luxury SUV. Our co-workers start dabbling in “meme stocks”, so we try the same thing. What is trendy or influential is not always the same as what is best for us.
Using Your Sudden Wealth As A Resource
Sudden wealth gives us more of a precious resource. This resource, wealth, gives us more options and freedom to do what we want, to bring more good things into our lives, and to care and provide for those most important to us. It allows us to be more of who we want to be.
To get the most out of our wealth, it is worth knowing what we want, and if we aren’t sure, working out what that might be. “Less taxes” and “higher returns” are not goals though—these are tactics to get us there.
As an exercise, one way to start figuring out what’s important is to imagine what I would do if I suddenly had ten times more wealth than I have now. I’m sure many of us can come up with ideas of what we might do differently.
Once we get past initial material desires such as “new car” or “around the world vacation”, then what?
The big takeaway we should get from these ideas is what they point to. Do you want to:
- Take away money stresses from my loved ones?
- Contribute to causes that matter greatly to me?
- Have more time and freedom to pursue other interests?
- Take care of my family’s future?
Drilling Down Into Goals
Once we have an initial direction, we can drill down into the items most important to you. When I do financial planning for clients, one of the tools I use is called the Wheel of Life.
This wheel helps my clients visualize all the things that make up their lives, and helps them focus on developing a vision of where we are heading, from which we can then take tangible action. It also helps us keep the end goal in mind as rules and regulations change.
Set a Course With Your Wealth
The decisions you’ll have to make after achieving sudden wealth can be a lot to process. After you’ve bought a few fun things, “what now?” is often the next question. The most important thing is to determine a direction and set a course. Once you’ve set that course, a financial planner can help you steer your ship in the right direction and keep you on track.