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
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.
I suppose if you aren’t used to managing money, your family and friends are moochers and you feel the need to buy every shiny bauble put in front of you then sudden wealth could be a problem worse than being poor. As for me, I’ll take my chances…send me that winning lottery ticket!
That’s kind of the way I feel. But, I have been investing and budgeting for a long time. I wouldn’t feel the need to buy a bunch of junk.
The worst has got to be the sharks. If you suddenly came into a lot of money, you don’t necessarily have the skills to hold onto the money, and the sharks can smell this blood in the water. The government might be the most blood-thirsty shark of all — at least with the others you have to be conned, but not them. That’s gotta be rough for the guy that spent it before paying his tax liability. :S
Yeah, I feel very bad for him. But, he litteraly wasted the money in a very short time on stupid stuff. He bought a bunch of ammo and shot it up. He bought a dune buggy, which he flipped and it’s now broken, and he drank up a lot of the money. So, he doesn’t even have anything he could sell to pay off the IRS. I don’t know what people are thinking sometimes.
I agree with Invest it Wisely – it’s tough to know who your friends are after you make a huge sum of money. Suddenly you’ve got friends you don’t remember and new branches on your family tree – but, odds are, these people wouldn’t have ‘found you’ if you were still poor.
If I ever won the lottery? Gotta lawyer up real quick!
Paul, there’s an old saying that if you lend someone $20 and never see them again, it’s a bargain. I’ll bet lottery winners could lend everyone a small amount and that may keep them from coming back.
I think it’s sad people don’t look to themselves to solve their own financial problems, instead of looking to others. The easy solution is usually part of the problem.
Great points! Not sure if you read it already, but definitely check out Mark Hoekstra’s study about lottery winners in bankruptcy! He proves that the same rate of big lottery winners file for bankruptcy after a couple of years as people who won very small amounts. Even worse, the ones with big payouts going through bankruptcy had absolutely nothing to show it! It’s incredible just how badly some people can handle money…
Thanks for stopping by Eliza.
It was an interesting read, especially the part where women who win a small amount of income are less likely to marry. I hadn’t thought of that, but it makes a lot of sense.
I suspect most lottery players aren’t the most fiscally astute, which is why the lottery appeals to them. If they had a solid financial plan that could accumulate wealth, they wouldn’t be betting on a million to one shot. Of course, nobody wants to save for decades to become successful. Everyone wants to get rich now.
Very true!
I am fun of reading this kind of blog, so true that happens to the life of individuals…
I rather spent my life working and getting the right success than creating precious things in a single hour, because wealth without hardship is always gone faster…. All things will be useless!
I agree Coline. People never value things that come easy, while the things they worked hard for become very precious.
It is so true that the leeches come out of the would work, I fell into a large sum of money due to a back injury and the day I deposited the large check from the insurance company my girl friend suddenly had a caption floating over her head with $$$$ signs.
My girl friend expected me to put up a $10,000 bond to get her brother out of jail and she also wanted me to pay off $2,500 in parking tickets that she had, she had a list of things that she wanted done.
I knew right then what I needed to do, that’s right, I kicked her to the curb.
-Joseph
Thanks for stopping by Joseph.
It sounds like your ex-girlfriend and her brother were both pretty irresponsible. That’s a lot of money for parking tickets. If you had of bailed them out, I’m pretty sure they wouldn’t have learned their lesson and would be right back in trouble.
It is unfortunate that than when many people suddenly receive wealth they splurge it, and in the process end up destroying their lives. Other the other hand when they use it wisely and for the good of other they are blessed many times over with piece and joy.
Very interesting statistic. I guess with the old man it was too much for him to handle.
What a stunning picture for the article. I was shocked. I think grandpa was happy enough with his live ’cause he had lived for 98 years. Time is much more expensive.