You are hopefully living life within your means, paying off or avoiding consumer debt, and building net worth. If you are, then congratulations. You already have a winning strategy in place, and you probably already know what you need to do in order to grow and protect your nest egg. But what if you suddenly found yourself with a windfall such as an inheritance or a lottery winning? Would you know what to do with newfound wealth? Suddenly having a large amount of wealth can be a bittersweet experience for many not accustom to managing money. I’m going to focus on some of the biggest mistakes that some people make when they suddenly find themselves wealthy.
Statistics say that around 70% of lottery winners will go broke within a few years of receiving their winnings. So, what are some common things that they are doing that is causing this? Let’s take a look at the main ones so you can protect the nest egg that you have accumulated and to help yourself not become a statistic should you come into a large amount of money in a short time span.
Giving it all Away
I’m not speaking about charitable giving. That is a noble thing to do, and something that can be done whether someone is wealthy or not. This is more about a person who comes into a windfall of money and feels pressure and an obligation to give large amounts of it to family and close “friends.” People close to you can develop an unrealistic expectation that they deserve some of the money that you have. Winners feel guilt and cave. It is often hard to stop once this starts. This same phenomenon is seen with professional athletes who sign their first big contract. The stories are all too common of the once rich sports star now broke just a few years removed from playing.
One solution is to have a third party to act as a gatekeeper of your wealth to prevent people from taking it. Having a reputable certified financial planner and an attorney can be an invaluable resource in this instance. Tragically, many don’t employ their services, or they surround themselves with the wrong people.
Wasteful Spending
Wealth and money are often a mindset and a set of habits and rituals. People who build wealth do so often because they live below their means, save and invest diligently, and constantly work towards a specific set of goals. While not always the case, people who are bad with money and who are always broke with no savings or investments are that way due to poor life choices. If these types of people are suddenly given a large sum of money, then their mindset towards money will still be there. The poor choices that they made when they were broke will continue to be made when they have money. See above where 70% of lottery winners will be broke in a few years’ time.
Endless vacations, new cars, houses, consumer goods, gambling, and partying quickly evaporate most peoples’ winnings. A lot of lottery winners end up filing for bankruptcy, and some have a much more tragic ending. Ending up in prison or dead.
Bad Investments
A lot of people who suddenly find themselves with money don’t know what to do with it. With no history of knowledge or investing, they end up making bad investment choices. Having a bad or no financial advisor, not seeking the help of a quality CPA or attorney, chasing bad stock investments, or opening a business without knowing how to run it can all evaporate your newfound wealth in short order.
In addition to the scenarios above, there is also the case of newly rich people being taken advantage of or scammed. A seasoned investor who has built wealth slowly over many years will have knowledge of what to do, who to trust, and what to invest in. At least in most cases. However, someone who suddenly comes into a large amount of money and is ignorant about managing it can and sometimes will be taken advantage of. Friends, family, and scam artists posing as investment advisors are all possible predators to someone with newfound wealth.
In Closing
If you are living on a budget and saving for the future, then you most likely have nothing to worry about financially. But, anyone can fall victim to a scam if they aren’t careful, and anyone can make a bad investment decision if they don’t do their due diligence and research before jumping into something. Hopefully, the examples given in this article will make you realize that wealth must be cared for and tended to. When neglected and treated with a reckless attitude it will soon be gone. Building wealth is a mindset and an attitude. Treat money well and it will return the favor.
See Also:
Building Wealth Is Easier Than You Think
10 Smart Ways to Spend Your Gambling Winnings
Financial Decisions To Make If You Win The Lottery
Managing Good Debt vs Bad Debt
Based in the Pittsburgh, PA area, Brian holds full-time employment as a Warehouse Manager for an electronics firm. Brian enjoys wealth building, investing, gardening and the great outdoors. Brian holds a B.A. in Environmental Studies from the University of Pittsburgh and an MBA from Robert Morris University.