Problems caused by Sudden Wealth

I was reading an interesting article on Investopedia called Sudden Wealth Syndrome: The Great Destroyer of Prosperity.  Evidently, the only thing worse than being broke is to suddenly become wealthy.  This article provides a number of examples of people who won the lottery and it ruined their lives.  Me personally, I would be willing to take the risk.  But, I can see how easy money can become a problem.

Dream vs. Reality

Lottery Winner Dies

Image by Mykl Roventine

I think the biggest problem with sudden wealth is that the dream is very different from the reality.  People who dream of winning the lottery think it will solve all of their money problems, when it often creates more problems than it solves.  Instead of a happy life of leisure they are now tasked with the responsibility of managing this wealth.  Or, they quickly squander it and wind up in worse financial condition than before.

The reality is that wealth is a lot more difficult to manage than a humble paycheck.  Finding the proper types of investments and avoiding unnecessary tax liability is complex and difficult.  It can bring a lot of stress and pressure.  I know someone who recently inherited some money and spent it before paying the taxes to the IRS.  Needless to say, he is in a lot of trouble and way worse off than if he had never inherited the money.

Moochers & Opportunists

Another thing that happens to athletes, entertainers and lottery winners is they are overrun by people looking for a piece of their fortune.  Soon, there are salesmen, agents and financial advisers contacting the recipient at their most naive and vulnerable time.  They know the longer someone holds onto their money the less like they are going to give it up.  But, if they can catch the athlete that just signed or the lottery winner who just cashed their check, they have a great opportunity to convince them to part with their money.

Another huge problem is that friends and family feel entitled to the good fortune of others.  They have the same lottery mentality as the actual winner and see it as a way to end their own financial problems.  Unfortunately, helping others in need often discourages them from helping themselves.  The good deed soon becomes expected and the financial assistance becomes an ongoing liability.  People with money are expected to pay for the meals, drinks and other expenses of those who don’t.  Soon, there is an entourage.

Shiny Things & Divorce

Mansions, boats, exotic cars and jewelry can quickly deplete millions of dollars in income.  In addition to the cost to buy them, there are very high taxes, insurance, operating and maintenance costs.  Houses can become a huge liability for people who move often or lose part of their income.  Shiny things lose a lot of their value the minute someone buys them.  Purchasing baubles and liabilities can evaporate a lot of money in a hurry.  Looking rich can make someone poor.

It’s a well known statistic that 85% of professional athletes are either bankrupt or divorced within five years of their final paycheck.  Child and spousal support is a big part of this equation.  Kobe Bryant just got divorced and it’s estimated that it will cost him $75 million.  I’m pretty sure Kobe will rebound from this financial setback, but others aren’t so lucky.  Getting divorced near the end of their career can be devastating.  Child support is another huge problem, since a career in professional sports rarely lasts 18 years, but the child support payments do.

The Bottom Line

The bottom line is that it’s far better to accumulate and enjoy wealth over time.  If someone is fortunate enough to suddenly become wealthy, they will need a lot of wisdom and discipline to turn it into a positive experience.

“Who is rich?  He who rejoices in his portion.”

The Talmud

Recommended Reading

Len Penzo – Why it Pays to Keep it Simple Stupid
Don’t Quit Your Day Job – It’s the Spending Stupid
Invest it Wisely – Sudden Bankruptcy Syndrome

This post was featured on the Carnival of Personal Finance over at Girls Just Wanna Have Funds.  If you aren’t familiar with the Carnival of Personal Finance, you need to check it out.  It’s full of fascinating stories and great advice.

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