Financial Planning for Sudden Wealth

I recently came across a thought-provoking article about sudden wealth acquisition in the Wall Street Journal. In the article, the author talks about how some younger employees and investors are accumulating sudden wealth through IPOs, well-timed market investments, and cryptocurrency.

Although the article profiles a younger age group, its lessons can apply to all of us. It outlines recommendations on the initial and important steps to take if you’re fortunate enough to have achieved sudden wealth—but there is much more to consider. In this article, we’re going to take a look at how we can use financial planning as a tool when coming into sudden wealth.

What to Watch Out For After Achieving Sudden Wealth

While there’s joy and excitement in gaining sudden wealth and in the choices that wealth brings, there are also many new decisions that must be made, which can cause stress. Questions like “How soon can I retire?”, “Can I quit my job and start doing what I’ve always dreamed of?”, “If I quit my job, will I still be able to pay for my kids’ college education?”, “Can I now buy my dream home and still do all these things?” are all common questions when people come into sudden wealth. 

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:

1. Keeping Score Versus Leveraging Your Wealth

Often, we fixate on how high the “score” is and forget about the question of “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 many of my co-workers missed a prime opportunity to use their wealth as a resource.

I learned then that the “score” truly doesn’t matter until you have converted it into something that will tangibly improve your life.

2. Reacting Versus Planning

Even if we do acknowledge the sudden wealth, we often get caught up in the technicalities of how to manage taxes and how to preserve or grow that wealth. The WSJ article lists helpful recommendations and initial steps, but many only 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 to what to do with their wealth.

3. Doing What Other People Do

We also often make decisions based on what other people are doing. We see 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. However, 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 a precious resource. This resource 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 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. But “less taxes” and “higher returns” are not goals—they are tactics to get us there.

As an exercise, imagine what you would do if you suddenly had 10x more wealth than you 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 “buy a new car” or “take an 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 loved ones?
• Contribute to causes that matter greatly to you?
• Have more time and freedom to pursue other interests?
• Take care of your 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 they are heading. From here, we can take tangible action. It 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, the next question is often, “What now?” The most important thing to do is 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.