Sudden Wealth Syndrome Explained

Welcome to EWA’s FinLit podcast. EWA is a fee only RIA based out of Pittsburgh, Pennsylvania. We hope all listeners of this podcast will benefit as we deep dive into complex financial topics that we will make simplified for you. And we hope that this really serves as a catalyst so that you can make the best financial planning decisions for your family and also save time. Welcome everyone. On this week’s Finlip by EWA podcast, we are discussing what a sudden wealth syndrome is and how to address it. So joined here by Jameson Smith. Jameson, we’re going to see, we’ve already started to see a huge shift of wealth upon passing from generation to generation. So you know, there’s more 65 year olds in America than there are 15 or younger.
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Speaker 1
00:58
This is the first time in America and generally speaking, the older you are, the more wealth you have because so the majority of wealth in America right now is with older people. So. And a lot of things we see in the market or behavior is more of a wealth transfer actually from younger poor people to richer older people. However, when someone passes money on their kids or if someone, you know, the very low probability wins the lottery overnight, there’s actually like a phrase out there called sudden wealth syndrome and there’s a lot of difficulties that come along with that. So Jameson, what are your thoughts on this?
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Speaker 2
01:40
Yeah, I mean it’s very, I’ve never had this happen to me, but I’m assuming and just based on what we’ve seen with clients and what the research shows, it’s very different mentally to not have any money and then inherit a bunch of money for a number of reasons. But have you ever read the book maybe in high school, like Great Expectations?
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Speaker 1
02:00
I probably spark noted it.
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Speaker 2
02:03
Yeah, same. But basically the guy as anonymous benefactor and like inherits a bunch of money and then goes to like London and like tries to like fit into high society and he makes like a bunch of bad decisions and stuff. Maybe that isn’t even exactly what happens, but that’s like the gist of it. I don’t really remember all of it, but yeah, this is a real thing. So.
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Speaker 1
02:22
Well, a couple, I mean a couple principles that we live by. I mean money doesn’t, it doesn’t change you. Basically it magnifies who you are. So if you’re, if you’ve gone from a zero net worth suddenly to a million dollar net worth, it’s going to show you who you are pretty quickly. And so they say also, and I Completely agree with this. I don’t have any statistics to back this up. I can just say from my personal life experience over the last 15 years, those that create wealth from scratch are, I would say, are almost very extreme. High probability they’re going to keep it for their lifetime.
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Speaker 1
03:00
Those that inherit wealth that didn’t have it prior, there’s a high probability that they’re going to in some way have a difficulty psychologically or squander a lot of it before and hopefully not all of it, but make some initial poor decisions. And I think some of the reasons behind that is if you had to earn it. Another good quote I love is like, the money you have on your net worth is basically a representation of how much value you’ve provided to other people.
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Speaker 1
03:30
And so, and there’s obviously, you know, people that have not done it ethically out there, but just in generality, let’s say you did it from starting a business, or you did it like you went to med school, became a doctor or an attorney, law degree, or just, you know, any career out there could be a blue collar with that worker that, you know, you went in, you started saving into your pension or your 401k every paycheck. To do all that, you have to learn the hard work ethic. You have to learn how investing works, you have to learn how taxes work. So you have the skillset that you develop. But if you don’t have that skillset and then you suddenly inherit, the goalpost moves almost instantaneously before you have a philosophy around money, before you have a philosophy around spending.
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Speaker 1
04:16
And then you’re probably around a friend group that had a similar net worth to you. And so I love the quote, the Warren Buffett quote. You become the average of the five people you surround yourself with. So if you’re still now with your old friends and they all know you have money, there’s probably a formula for a lot of bad decisions or, you know, putting gasoline on a fire.
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Speaker 2
04:38
Yeah, I think I feel like I said this like 100 times on this podcast, but 70% of the wealth is gone by the first generation, 90% of wealth is gone by the second generation or something like that. It’s exactly what you said. Like, the people that build wealth for themselves develop these values and character traits, and, you know, they became wealthy for a reason. Most of the time they work really hard, they maintain those values to keep the wealth. And then when you give it to someone that’s never worked or done anything, usually they lose it. But this says sudden wealth syndrome, basically based on psychological studies, unexpectedly acquiring a significant amount of wealth has generally led to crisis of identity, depression, insomnia and anxiety. So it’s really like the opposite of what people think.
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Speaker 2
05:33
Like you have more money, it solves all your problems and it a lot of times just exemplifies your, it magnifies your problems.
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Speaker 1
05:39
Yeah, absolutely. And there’s a book that actually talks about this, but the like imposter syndrome you can feel around finances and there’s like four P’s, perfectionism, paralysis, people pleasing and procrastination. So you know, we’ve seen all of these in real life, but especially people pleasing and procrastination. So people pleasing would be like almost feeling guilty. You have wealth and your friends don’t, your family doesn’t. And so then trying making bad decisions. I would add a fifth one there, privacy, I think that could be key. And then procrastination is like not hiring, not self educating yourself, procrastinating on decisions and starting to make moves before you can see the big picture. So I’d say to give anything, I want to start going to some solutions if you’re on the giving side and then also solutions on the receiving side.
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Speaker 1
06:29
But before we go there any other things to point out?
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Speaker 2
06:31
Yeah, before we do the solutions, let’s just run through this is an article based on psychological studies that studied this. So one is identity crisis. So basically you’re used to a lot of people, their profession or whatever they do in life becomes their ident. So maybe you have, whatever you’re doing, you’re not super wealthy, you’re in one social status, people around you, like you said, you have a complete now identity crisis. I have all this money, I don’t fit into this community. I was around, what do I do? So that’s one thing.
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Speaker 1
07:00
And you’re not, you know, it’s, you’re kind of in a purgatory at that point because you’re not going to fit in. Like let’s say you had a friend group that you’re in your early late twenties, you’re all making about like 75 to a hundred grand a year. You’re going to have certain habits, you’re going to have similar hobbies, you’re going to have certain things you do on the weekends, similar free time. Then let’s say you inherit a million dollars and you start to get a new friend group. With that new friend group, it’s like you’re not going to have financial similarities to your old friend group. And you’re not going to probably to the new friend group because the new friend group maybe they created that wealth and if you haven’t educated yourself or like it just, it’s purgatory for a while.
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Speaker 1
07:43
So it’s actually like a, it’s kind of an off without preparation from the giving side and the receiving side. I know we’re not going to solutions yet. You can kind of go into jail as a result of mental jail. Sudden wealth. Yeah. Mental jail. Yeah. And financial jail. You can. Which can lead into financial.
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Speaker 2
08:00
Yeah. Bad decision. Yeah, for sure. The next one says financial imposter syndrome. So basically you just think you don’t deserve it because you she didn’t earn it. Guilt and anxiety, like you said, feel guilty, feel like you don’t deserve it, feel like you have to give it to other people pleasing. And then fear and paranoia. So like fear that you’re going to lose it. And then the other one that’s really interesting isolation and loneliness for exactly what you just said. You’re kind of, you’re kind of in this purgatory where you don’t know who you, you’d almost have to get into a like a group of people that also inherited money to like have the similar problem which I feel like is hard to find.
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Speaker 2
08:41
But those are basically the psychological impacts that psychiatrists, psychologists have studied and said that what sudden wealth syndrome can lead to. So yeah, I think now let’s get into some solution action items to how we can avoid this or help mitigate all of this.
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Speaker 1
08:58
So let’s talk about the giving side. If this isn’t a sudden death, if this is just like you’re a rich parent, you know, let’s say you’re a doctor and you have kids who have chosen a different path. They’re kind of on the median income in America. They’re used to a high lifestyle that you provided, you know, where they’re under your roof. And now they can’t do that themselves. So this is what we see that’s very. All the time, very common. So if you’re the giver, you know, it would be a lot of the natural tendency would be to, you know, take responsibility. Even when your children are out of the house, just keep providing them a paycheck on top of their paycheck, keep giving them. That can be good if it’s done correctly, but we’ve seen it done.
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Speaker 2
09:40
Detrimental.
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Speaker 1
09:40
Yeah, or it can be detrimental. You can, they can lose all motivation. Oh, my parents are just going to provide why would I even do it myself? So I think more important than money is just starting the baseline of like educating them or getting them in front of an advisor, get them in front of some resources, books, etc just so they can self educate and how to develop financial independence and maintain it and just basic financial literacy. And then secondly share like philosophies like here’s it’s a good exercise for yourself. Like here’s why we have wealth, here’s why we created it, here’s what it means to us and here’s what we want it to do for you. And just having some very. They’re not easy conversations. Money is very taboo.
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Speaker 1
10:20
But having some very tough conversations can lead and then start slowly giving while they’re living. Don’t wait till they die. And a methodical process I would say at first don’t give them money to spend, give them money to invest so they could spend their whole paycheck and create a lifestyle. But they shouldn’t have a lifestyle depending on you continuously giving them money because then if they start making bad decisions, you take that away. Then maybe they can’t even afford that house they live in.
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Speaker 2
10:47
Yeah.
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Speaker 1
10:47
So you know, start funding a Roth IRA or start replacing, give them an extra match on their 401k. If they put a thousand in their 401k, you give them a thousand cash. But they’ll only give that if they provide a statement or something every couple months. So that is what I would say on the giving side is do it with intention, do it methodically. Anything else to add to that before the receiving side?
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Speaker 2
11:11
No, I think it’s important to have those explain to the kids how you made your money and what you went through to do it so they have an understanding of it. And then I would say another thing, if maybe you’re doing that, maybe you’re not. If there is going to be money left over like proper estate planning and is really one of the main purposes of a trust is to have the money protected and have restrictions on what they can and can’t use it for. So like really simple solution is have a trust document drafted that you know you’re going to have $10 million left over. The trust gets funded with your $10 million in standard trust terms or they can access the money for health education, maintenance and support. So it’s really loose terms.
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Speaker 2
11:53
They can use it for anything to maintain their lifestyle, but they can’t increase their lifestyle significantly. So they can’t go on crazy vacations, go buy a Ferrari, do things that would generally lead to bad decision making and spending money, getting on the hedonic treadmill of materialistic things for money they didn’t earn, that’s usually where that, you know, starts to slide and bad decisions happen.
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Speaker 1
12:16
Absolutely. Yeah. I would say furthermore, for the receiving side, you know, if this just were me, like giving advice to my daughter, for example, I would say if there was, if this was like a sudden thing, I’d say put yourself in like a 12 month probationary period. So during the first 12 months, like if you inherited a million dollars and you weren’t used to that kind of money, like your net worth, you were still in debt. I would say first of all, I’d give yourself permission to pay off all debt outside of your mortgage. So if you have any credit card debt, student loan debt, like wipe out debt and then take those payments that you were making into the debt. Half of it put into your lifestyle. If you were stressed, the other half save automatically.
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Speaker 1
12:59
And once you’ve been able to do that systematically for 12 months, and during that 12 months, I would say you have to educate yourself through, you know, financial literacy course, a couple investing books, like maybe one a month after the 12 months is up, then you could start making bigger decisions with that money. But I would keep that money outside of paying debt as if it doesn’t exist for the 12 months. You can let it settle. All those problems that you listed, a lot of them are just initially. And a lot of people make the biggest mistakes because of the high emotions. And once you make a big purchase and you buy new, like that’s the new. There’s many studies on addiction and the brain. Like, that’s the new goalpost minimum for you to reach for you to hit dopamine.
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Speaker 1
13:42
And that’s never gonna go down. So if you go buy a Lamborghini with that, you’re never gonna be happy with another car. For the, just as an example, so.
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Speaker 2
13:50
To say go like go stay in a Ritz Carlton for a night and then try to stay in a, you know, a days in like it’s really hard to go back and do that once you’ve seen the higher lifestyle that you can do.
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Speaker 1
14:02
Yeah, so definitely. And then I would say, you know, there’s a difference between like so much privacy where you’re isolating yourself versus like maintain your friendships. I would be very careful with who you share your financial information with. You know, if it’s your family. Absolutely. If the family dynamics are good, if it’s an advisor, absolutely. But you know, close friends. And just be careful because money can change people. Jealousy can come into a factor, people’s influence over you. People are greatly influenced by their closest friends. So you have to be very careful with how that information could. Because a lot of people are struggling. So a lot of your natural tendency would be to try to help, help, help.
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Speaker 1
14:43
So I think it just in generalities, like educate yourself as much as possible, not only from a financial standpoint, but just from like more of like a psychological standpoint to it, what you value, what your long term and short term goals are. Because in today’s society it’s like, how can I get dopamine right now, this second on social media? Or how can I? So you have to go screen free for a couple of days or a week after receiving the money and just like write out all your thoughts. But yeah, those are some of my thoughts. But basically the in summary is being hire an advisor that you trust. Extreme intentionality, extreme education. And then there’s an artwork of balancing different factors of like maintaining very close friendships, but also, you know, keeping stuff private as well.
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Speaker 2
15:32
Yeah. Bottom line, educate yourself, get a financial plan. If you, if you have this happen to you so you don’t blow it. I mean it’s same thing, like athletes are a good example just because there’s like documentaries on this, like inherit a bunch or not inherit, make a bunch of money and then you’re stuck with a lot of the, you know, if athletes came from nothing and they have a lot of those people around them that they grew up with, they’re going to be asking you for money. So learn how to set boundaries that could be family, friends and just really do the work to not blow it all.
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Speaker 1
16:00
No question. Well, James, thanks for joining and look forward to catching everyone next week. Thanks for tuning in to our podcast. Hopefully you found this helpful. Really hope this is as beneficial and impactful to as many people across the nation as possible. So hit the follow button, make sure to rate the podcast and please share with any friends or family members that would also find this beneficial. Thank you very much.