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It may seem like a problem you'd love to have: Deciding what to do with a sudden inheritance from a long lost relative or a big win in the lottery.
But, as the sad tales of some lottery winners clearly demonstrate, sudden wealth could quickly spiral into a living nightmare — with the loss of not only wealth, but also family, friends and even health.
If you're lucky enough to receive a windfall, understanding the psychology of sudden wealth can help you take the right steps to protect your money and lifestyle.
"People think windfalls are about money. But it's really all about change and transition ... and people need time to adjust," says Susan Bradley, a CFP who is the founder of the Sudden Money Institute in Palm Beach Gardens, Fla., and author of "Sudden Money: Managing a Financial Windfall."
Money shock isn't necessarily limited to those who get millions suddenly deposited into their bank account.
In fact, unexpectedly getting as little as three months' worth of salary in one lump sum can set off a chain reaction of panic, guilt and fear for some, according to psychologist Dennis Pearne, co-author of "The Challenges of Wealth" and a wealth counselor and consultant based in Framingham, Mass.
"A person making $60,000 a year ... who suddenly has $15,000 plopped in their lap" can go into money shock, Pearne says.
Following are four steps that can help you adjust to a new financial reality after a windfall.
The shock of a sudden windfall can set off a litany of irrational behaviors, such as giving all the money away, becoming a recluse, spending the money lavishly, and hiding or hoarding the money. Other hallmarks of money shock include engaging in self-destructive and expensive activities such as drinking, using drugs, gambling and sex addiction, says Pearne.
Bradley says such problems stem from the fact that most people don't understand the limits of their new wealth, especially if the windfall is relatively large.
"(The money) can seem infinite ... people often get an 'I'm invincible, anything is possible' feeling," she says.
These powerful emotions may create trouble for those with new wealth.
To counteract these emotions, it's important to allow time to adjust to the new wealth circumstances that follow a windfall. Pearne and Bradley recommend that people who receive a windfall do nothing with their money for at least a few months, if not an entire year.
That means saying "no" to gifts for family or friends, new investments, lavish cars or house purchases, and trips around the world. It's not even wise to retire.
"Park your money someplace safe where it won't depreciate and take a money holiday," Pearne says. He recommends CDs as one possible home for the new cash.
Bradley says the money moratorium acts as a timeout that allows you to come to grips with your new financial situation, set the stage for better decision-making and get your emotions under control.
"Emotionally, a windfall results in a stress reaction," Bradley says. "When people are in that state, they are using their reptilian brain and are prone to react rather than respond."
During the money moratorium, there is a lot of work that needs to be done. While the money is safely parked in CDs for six months to a year, start to assemble a team of advisers you trust, including a fee-based financial planner, an estate attorney, a money manager who has experience with high net worth individuals and an accountant, Bradley says.
"This is a time to discover, organize and explore," Bradley says.
Sudden wealth can lead to what psychologist Pearne calls "identity dissolution." All the parameters set up in life that define identity are suddenly gone.
After an especially large windfall, traditional work may become an option rather than a necessity; all the years of school training to get to a skill level are no longer necessary for survival.
Social circles — the people who you hang out with in your socioeconomic sphere — may change. People also may come out of the woodwork looking for a handout, children may demand more money, and family members or friends may feel resentful or become predatory, he says.
"Everything a person has spent decades building changes in one fell swoop," Pearne says.
He says that in his practice, he notices that about half the people who attain sudden riches spiral into self-destructive behaviors.
"This is because the existential question 'Who am I?' has suddenly changed by light-years," Pearne says.
When a windfall is the result of the death of a family member, it is doubly confusing, Bradley says. Grieving heirs may also feel guilty at being secretly thrilled about the money.
Psychological problems can arise if friends and family are unsympathetic to the stresses of new wealth and cannot help them with this unusual dilemma. Unlike other types of major transitions — such as divorce, a move or death of a loved one — the transition into money is not something that is seen as a "problem" by society, Bradley says.
Pearne suggests therapy — ideally with a professional who has experience in the psychology of sudden wealth — to help resolve some of these issues.
Alan Moore, founder of Serenity Financial Consulting in Shorewood, Wis., advises people who receive inheritances or large bonuses from work to set the money aside into a bank account that isn't used for day-to-day transactions.
"This way, you aren't seeing the money every time you log in to check your bank balance," he says. "Seeing a large sum of money every day makes you much more likely to spend it."
But that doesn't mean you have to avoid touching it altogether. Give yourself permission to celebrate by spending some of the cash doing something fun.
One rule of thumb is to earmark 10 percent of your cash as fun money. But, Moore says, it depends on your situation, and the size of the windfall.
"I do think that windfall recipients should spend some of the money on themselves," he says. He recommends taking a vacation as a great way to spend the money.
"Anything that is going to lead to memorable experiences is likely going to be better than buying more stuff," he adds.
Bradley documents three phases of sudden money in her book. She says the first phase encompasses a steep learning curve that can last for as long as five years, much like a grieving process.
"It is longer if the money was the result of the death of a loved one," Bradley says.
Although the adjustment to a windfall can take five years, it's wise to review your situation and make some decisions at the one-year anniversary of your financial upturn, she says.
Once you begin to become comfortable in your new financial reality, you may be ready for the successive phases, which include reviewing your situation and deciding how the money will be used, Bradley says.
This is the fun part, when you'll choose — with the help of your trusted advisers and a solid financial plan — whether to retire, buy a vacation home, donate to charities or set up trust funds for your children.
The ultimate goal of all these steps is to create a sensible plan for handling your windfall that also allows you to come out with your relationships and sanity intact.
"The whole point of process is to build a better sense of well-being," Bradley says. "Holding onto the money is only part of the equation."