How to avoid mistakes when you find yourself with unexpected wealth

Norman Boone, Founder and President, Mosaic Financial Partners

Oftentimes, when people find themselves with a “sudden money” event, they’re overwhelmed with the new demands and new decisions they need to make. Whether that money comes through an inheritance, insurance settlement, divorce, stock options or a lottery win, it is going to make a significant difference in your life. If you don’t give yourself some time to figure out how to deal with your new level of wealth, you are likely to make a number of mistakes you’ll regret later, says Norman Boone, founder and president of Mosaic Financial Partners Inc. in San Francisco.

“Suddenly having money that you’ve never had to deal with before can be very difficult,” says Boone. “While you may be tempted to jump in and buy that new Porsche or home in Tahoe you’ve always wanted, taking your time will ensure that the money is used in a way that is right for you.”

Smart Business spoke with Boone about the three steps to making sure unexpected funds are used in an intentional way.

Isn’t suddenly having a lot of money a good thing?

Most of the time, yes. But, it’s important to recognize that most of us have emotions surrounding money. In addition, the issues that can lead to a significant jump in our level of wealth — inheritance, divorce, loss of a spouse, retirement — are themselves emotional events. Put the emotions you have about money on top of the feelings arising from those events, and it can become overwhelming.

What should happen first after coming into sudden money?

The first step is one of adjustment and planning. You need to get used to the idea of having this new money and it’s critical that you do some planning. What do you want out of life? Who do you want your friends to be? Where do you want to live? What things do you want to be involved in? Do you want to continue to work, volunteer, or just play golf? There are a lot of choices about how you want to live your life and how you’re going to share the wealth. What would you end up feeling good about, or what would you feel guilty about? If you make spending decisions too soon, you’re almost certainly going to make mistakes and do things you’ll regret later, as well as limit the choices you’ll have later on.

We advise our clients to take a year to think about these things and prepare. Find an adviser who has helped clients through these issues before. Don’t be afraid to discuss what seem to be ‘stupid questions.’ This is a new experience and so there are going to be new complications in your life. Begin to set goals, see how those feel to you and figure out the things you want for yourself and your family.

The biggest mistake people with new wealth make is that they quickly spend it on things that seem appealing. They are easy targets for friends and family who want something from them. While buying some new things is natural, defer the really major decisions until you have a clearer view of how to deal with the wealth. Those who spend too quickly almost always wish they had done it differently.

Family, friends and oftentimes strangers don’t always have your best interests at heart.  Friends will expect you to pick up the dinner tab. Most people who have publicly received new wealth are inundated with investment ideas or requests for gifts or loans. We suggest that ‘no’ be the answer until you have a well developed policy to help you decide how to deal with those requests.

The first phase also involves finding the right advisers. You want people who answer your questions respectfully and in ways that you understand. They should be well qualified and have experience working with others who have enjoyed sudden wealth. They should be well regarded by other advisers and should be willing to commit to always making recommendations to you that are solely in your best interests.

What is the second phase?

Phase two is the action phase, in which you start to implement the plans you’ve developed in phase one with your attorney, accountant and financial adviser. This will typically involve making investment choices and developing a whole new estate plan. It may include setting up charitable strategies, perhaps deciding if and how you might share some of that money with family.

Having good plans will allow you to make good decisions. It’s important that those decisions reflect your wishes and not what anyone else wants from you, including your advisers, family members and friends (all of whom will want to offer you advice).

What else needs to be considered?

The third phase is the monitoring and adjustment phase. When you discover that early decisions were not optimal, it’s OK to change your strategy. When your money is at work, the right planning has been done and you’ve begun taking the right steps, you can also start to think about larger projects. Are you going to get involved in charities? Depending on how much money you have, charitable work can be a gratifying way to share your wealth. It’s also a way to get family involved in enjoying the benefits of the wealth and help them learn to deal with money that may eventually be theirs.

You should see your advisers regularly to ensure you stay on track. We recommend you meet with your advisers at least once a year, and more often if you have larger amounts, because questions come up and things change. Do not be afraid to ask questions or use the expertise of your advisers. This is your ‘wisdom team,’ and if you’re not taking full advantage of them, you don’t have the right advisers.

Sudden money is everyone’s dream, but the reality is more complicated. If you do it right, the new wealth can add significantly to the quality of your life. Instead of impulsively squandering your opportunity, take your time and be thoughtful with it so that you can fully enjoy it.

Norman M. Boone is founder and president of Mosaic Financial Partners Inc. Reach him at (415) 788-1951 or [email protected]