Whether you have just received an inheritance, sold a business, or snagged an executive position, you now have a whole lot of cash to play with. Once the celebrations are over, you’ll be left with one important question: What do I do next?
The moment when the new wealth appears is deceptively dangerous. Interestingly, families who gain this wealth are as likely to retain it as they are to lose it. The difference between building more wealth and seeing it all disappear typically lies in recognizing and avoiding some crucial mistakes that aren’t apparent until it’s too late.
Treating New Wealth as a Lump Sum Instead of a System
The biggest hidden mistake families make following a big financial success is taking this money as a single pot of money, not as interconnected pieces that need to work seamlessly together to grow.
For example, let’s say you sell a business for $5 million. Your accountant puts it into a high-yield savings account. Then, your brother-in-law recommends a stock broker, who invests $2.5 million in growth stocks. Next, you purchase a life insurance policy from an agent. And then, a friend recommended a private investment. It doesn’t take long before it’s invested in multiple ways, by multiple people, for multiple purposes, but no one takes a step back to understand how these pieces relate to each other.
This fragmentation creates vulnerability for new investors. This is why many successful individuals realize that they require private wealth management, since it can be complicated to manage all the financial pieces. A wealth management company is akin to a financial quarterback, orchestrating all their financial moves so everything works harmoniously, rather than at cross-purposes.
Failing to Separate Your “Live On” Money from Your “Grow” Money
As soon as people experience a major windfall, they find it hard to draw a line between the money needed to live day by day, and the money needed to make new investments. This seemingly small mistake can lead to major problems.
This mistake is particularly insidious because it tricks you into making financial decisions every year based on how the market is doing. It means you don’t follow a consistent plan and keep worrying about your investments. This often results in poor investment decisions. The moment your lifestyle expenses are linked to investing, it becomes difficult for you to make rational decisions about where to invest. You tend to be too conservative because of the fear of market downturns, or too aggressive in anticipation of returns that never come.
To prevent it, you must learn to create a clear separation in your head and your account structure. First, determine how much money you actually need to live on for the next five to 10 years, give or take. Then, set that aside in a safe and accessible place; not your investment account, but a good savings vehicle. Take it as a “household budget” savings account, and anything above that should go into your “investment account” and be invested as per a long-term strategy that doesn’t get derailed by your monthly bills.
Making Permanent Decisions Based on Temporary Circumstances
New wealth typically appears at one particular moment, but families often make lasting structural decisions based on this. That’s not the right thing to do. Suppose a family inherits money and then right away invests in a real estate property because it appears to be a very safe investment. However, circumstances in life change; perhaps they have to relocate for work or have to pay off a major expense. That’s when they find them in a position where they can’t quickly utilize the investment they made in real estate.
Similarly, if a business owner sells their company and right away commits to a specific lifestyle or donates a set amount to charity based on the year’s bumper return on their investments, they find themselves in trouble when the markets decline the following year.
This happens because this new wealth brings with it a certain feeling of psychological abundance. When you find yourself with more money than you’ve ever had before, it’s easy to feel like this is just the way things are going to be. It’s difficult to envision anything changing. People also become more eager to reap the reward of their own success, ending up making commitments they later find impossible to manage. In order to deal with it, you must:
- Stick to a “wait and see” attitude in the first year or two after you acquire new wealth.
- Don’t make a long-term decision about how much you will spend, give away, and invest.
- Create a plan for the short-term that gives you flexibility as you adjust to this new scenario.
- Use the first couple of years as a learning experience and notice how your investments work out.
- Identify your true lifestyle needs now that you have more money.
- Get a sense of your tax situation and make decisions accordingly.
Remember, you can make better decisions about long-term spending and investments only after you’ve adjusted to having the money and stabilized your finances.
Endnote
The common thread here is that new wealth demands that you change your thinking and move from accumulation to stewardship. The mindset and strategies that helped you earn money often need to be replaced by those required to preserve, grow, and transfer wealth effectively. This is never going to be easy, and that’s why it makes sense to work with a professional whenever you can. Whether it’s a wealth management company, a family office, or a team of professionals, use all the help to create a plan that considers money as a system and makes sure that your wealth works toward your family’s real goals.
