Now that the Powerball lottery has arrived in California, I thought it would be good to talk about the impact of unexpected or sudden wealth on one’s life.  We’ve all probably dreamed at one time or another about how fantastic our lives would become if we could only win the lottery.  I’ve no doubt there are numerous winners who have significantly changed their lives for the better.  But there is a dark side as well, both financial and psychological.  Here is a brief exploration of the aftereffects of sudden wealth as well as ways you can avoid having it blow your life apart.

First of all, there are various ways in which you can find yourself in possession of a lot of money.  Besides winning a lottery, you can inherit cash or property, acquire control of assets through divorce, receive a lump sum or structured payout as a result of a lawsuit, or sell a business, just to name a few.  When such events occur unexpectedly, or the amounts received are unexpectedly high, you face the challenge of dealing with a level of wealth to which you may not be accustomed.

Carl Richards in the New York Times asserts that on average, 90% of lottery winners go through their winnings in five years or less.  That’s not an encouraging statistic.  Whatever the actual number is, the media is replete with stories of lottery winners who have squandered their winnings in foolish ways.  Take Willie Hurt of Lansing, Michigan, for example.  According to Bankrate.com, he won $3.1 million in 1989.  Two years later he was broke and charged with murder. His lawyer said Hurt had spent his fortune on a divorce and crack cocaine.  Then there’s Missourian Janite Lee, who won $18 million in 1993.  Lee was generous to a variety of causes, giving to politics, education and the community.  But according to published reports, eight years after winning, Lee had filed for bankruptcy with only $700 left in two bank accounts and no cash on hand.  Even worse is the case of Abraham Shakespeare.  John Campinelli in Ohio’s Plain Dealer reports that after winning a $31 million lottery jackpot in Florida in 2006, Shakespeare disappeared three years later.  In 2010 his body was found under a concrete slab.  “A woman who had befriended him — and fleeced him for $1.8 million, say police — has been charged in connection with his murder.”

Short of murder, what else can you expect as a result of sudden wealth?

One common experience is being deluged by people looking for a piece of your fortune.  You will hear from salesmen, agents, financial advisers, charities, et cetera promising great benefits to you for giving them your money.  They want to get to you fast (while you’re at your most vulnerable), since the longer you hold onto your money, the less likely you will give it up on impulse.

You will also hear from friends and family, including those you haven’t seen for some time.  Some may feel entitled to your good fortune and will expect you to share it.  You may find yourself paying for meals, drinks and other expenses whenever you get together.  Without careful planning there’s a good chance you will develop an entourage of moochers.

Then there are the psychological effects.  The MMCI Institute, which coined the term “Sudden Wealth Syndrome,” reports a number of symptoms.

• Identity confusion.   Having money is an opportunity to re-think your life, your relationships, your work, and your involvement in your community. Some people develop feelings of confusion and uncertainty as to who they really are and what is really important to them.
• Guilt.  People can react to sudden wealth by punishing themselves for having received what they subconsciously believe they do not deserve or are entitled to.  The result can be self-destructive behavior.
• Loss of control.  If one does not have clear, guiding values, paranoid thinking can occur, such as excessive concerns that other people are out to get you or to take advantage of you.

Any of these feelings can lead to an inability to make decisions on the one hand, or to act impulsively in ways that lead to wealth destruction on the other.  At the very least you may find yourself dealing with stress and depression.

What are some steps you can take to avoid ending up broke or in a mental institution?

The first step is not to act, but to take stock.  You’ve got to put something in place to control your behavior and make sure you don’t lose that money.  This is the time to create a plan for your future – your goals, your aspirations, and the costs associated with them.   If you are unable to do it yourself, get help from a financial planner.  That’s what they do.  You may call it a retirement plan, or a ‘rest of your life’ plan, but its purpose is to ensure that you have a road map to follow to maintain enough capital to support your goals, both now and in the future.   Whatever you choose to do with your money, it’s important that you look after yourself first.

The next step is to set aside enough of your wealth to achieve your plan above.  And I’m not talking about investing it.  If your winning lottery ticket, inheritance, or other windfall provided you with enough money to last you the rest of your life, why risk it at all?  Invest it instead in safe assets such as U.S. treasury bonds or bank CDs.  You can even leave it in a bank checking account!   (Keep in mind, however, that CDs and bank accounts are each insured only up to $250,000.  You might want to diversify your holdings across numerous banks in order to manage the remote but possible risk of bank failures).  If you do need to invest your fortune, your plan should help you avoid risking more than you need to.

It will also be important to monitor your investments as well as your spending.  Discipline in managing your wealth and your cash flow will be critical to your ongoing success.  If you do not have a strong history of frugality, consider hiring a professional team consisting of a financial planner, tax accountant, and estate attorney to help you.

Now it’s time to consider others.  Do you have a brother-in-law that is looking for funding to start a business?  Or a nephew that wants to go to law school?  Or a friend with cancer and no insurance?  It’s fine to help them financially as long as it does not negatively impact your plan above.  Always remember that it’s your money, and you shouldn’t feel guilty about how you choose to utilize it.  If you’re charitably inclined, you can donate money directly to your favorite causes, or utilize donor advised funds.  Whatever you want to do, a good plan should allow you to compare different scenarios and help you make tradeoffs without compromising your future.  If your windfall was especially big, you may even be in a position to create your own foundation to improve some aspect of your community or world.  In any case, be sure to get help determining the tax consequences of your various choices, since you will be dealing with tax liabilities with which you are probably quite unfamiliar.

If you still have money left over after all these considerations, feel free to do whatever you want with it.  Think of this last bucket as “play” money.  Build a pound for stray animals.  Buy a Tesla.  Go to Las Vegas.  Although money will not buy happiness, you can still use it to generate a little fun!  Just keep in mind that no one has infinite money to spend.  Even Bill Gates has a plan for his wealth, and you can bet he manages it very carefully.