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Financial Decision Making and Sudden Wealth

With the recent Powerball jackpot win of over $2 billion, it is fascinating to think of just how complicated it could be to become that wealthy that quickly. In this interview in The Atlantic, a wealth advisor who specializes in sudden wealth talks about the “lottery curse” and how we weren’t meant to do nothing and just be wealthy.

All but a few of us will never have such problems, but I started thinking about those of us who build wealth over time through entrepreneurship, savings, and investing. We all struggle with financial decision making even when substantial wealth is built over time. So, what can we learn from the challenges that lottery winners face?

Focus on the income potential of your investments

Lottery winners need to choose between a lump sum and taking an annuity. An entrepreneur who sells her business has a similar choice in how she thinks about the invested sale proceeds. Is her focus on the principal balance or the income potential of her wealth? Focusing too much on the fluctuation of the principal can create added pressure: Pressure to make decisions, avoid losses, and to not make a big mistake.

A small to mid-sized business does not have a ticker symbol moving up and down during the day. A business owner who sells and invests the cash now can watch his wealth go up and down every day, a habit that could lead to bad decisions. An advisor can help focus on creating a reliable income stream that supports a fulfilling lifestyle. The result can be a sustainable financial plan and peace of mind.

Dig your relationship well before you are thirsty

Winners of lottery jackpots sometimes see their relationship with their spouse or partner change because of money. Some even go to great lengths to try and avoid the stress that more money could cause in their marriage. We don’t create money habits when we gain wealth. If anything, the financial habits of spouses are revealed, writ large, when more money is involved.

Winning the lottery is a surprise that will catch a couple off-guard, but you and your spouse are different. You have a chance throughout your relationship to make money a comfortable topic. Try starting the habit of financial date nights. Here are some questions that could open a dialogue about how you and your spouse feel about financial decision making:

  • What would we do if there was a windfall like the sale of a business or inheritance?
  • What are our beliefs about philanthropy and the causes we support?
  • Would we change how we support family members if we had a substantial increase in wealth?

Financial Decision Making: It’s natural to not know what you are doing

Lottery winners may not have experience managing money or know much about the tax implications of their decisions. Suddenly, they need to seek out advice or choose to go it alone and bear the consequences. Entrepreneurs, while they may have leaned on the advice of professional advisors to run their business, sometimes face similar feelings of doubt after a windfall. They might be thinking, “I know how to grow a business, accumulate, and invest…but spending my wealth is different. I am in uncharted waters.”

You may spend your life slowly building the skills of financial decision making with low consequences as you start from scratch. Then, when the stakes are highest after you have a life-changing liquidity event, you need a skill that you may have never used before. This is where you look to your advisory team to perform two roles: Technician and coach. Your advisor can help you create a plan for this new, dynamic reality. Equally important your advisor can coach you through the shift in mindset that is necessary to successfully navigate your financial life after an increase in wealth. If it feels different, it’s because it is. Others have been there, though, and you can learn from their wisdom.

Lottery winners have the fortune of overnight wealth and the misfortune that they can hardly prepare for all of its implications. Entrepreneurs have an advantage. They can prepare over time for the challenges and opportunities of wealth. For that preparation your spouse will thank you and your future self will thank you.

If you are looking for guidance in preparation for both you and your spouse, I’d be happy to sit down with you and talk it through. Contact me at [email protected] or call 610-709-5072.