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There’s a financial literacy crisis in the United States — and it’s not exactly surprising. Personal finance subjects are not widely taught in schools, and many Americans reach adulthood without the critical and requisite knowledge to effectively save, borrow or invest money.
Currently, just seven U.S. states require a stand-alone financial literacy course as a high school graduation requirement, missing a massive opportunity to help young people make more informed financial choices later in life.
So it’s also no surprise that young athletes or those who have come into a financial windfall due to an inheritance, the sale of a business or even winning the lottery, struggle with their new financial reality. The statistics are particularly troubling. The American Bankruptcy Institute reports that a majority of professional athletes face financial hardships soon after retirement, while economists have estimated that from 10 years post-windfall, lottery winners have managed to save just 16 cents of every dollar.
These financial follies can be linked back to the fact that too few Americans have a grounding in financial literacy. With that in mind, here are five critical considerations for anyone who experiences sudden wealth.
1. Create a realistic budget: Budgets are the same, whether you’re a professional sports star or have been working a 9-to-5 job. To create a sound budget, strive for balance but don’t be too rigid. You should account for expenses, savings and investments, while incorporating spending for personal interests or hobbies and charitable donations. As your financial situation changes, revisit your budget. Always pay yourself first and include a line item for savings to ensure a consistent income stream.
Put the plan in motion before receiving the funds so that you’re already thinking about fiscal discipline when it comes to your newfound wealth. The goal here is to live off the interest or income your investments generate, rather than having to dip into the principal. Marshawn Lynch, a retired NFL running back, is a great example. He earned about $56 million over the course of his playing career but used his endorsement money to fund day-to-day expenses, diligently setting his salary aside.
“ People will approach you with myriad ideas about how to invest your money — many of them questionable. ”
2. Learn to say ‘no’: Financial success and sudden wealth can bring disingenuous and dishonest people out of the woodwork. Begin preparing for the inevitable onslaught of monetary requests from acquaintances or even strangers, while emphasizing creative and empowering ways of supporting loved ones, such as paying off their debt. This frees those close to you to improve poor spending habits and remain out of debt, versus buying them a luxury vehicle or house that in fact may handcuff them further financially.
Spend time identifying who you want to support, how you’ll do so and how much you’ll allocate to family and friends. Work with a team of professionals, including accountants, lawyers and financial planners, to determine exactly how much you can give away without harming your nest egg. In my own practice, I encourage those experiencing sudden wealth to support family and friends but also to be cognizant of their own financial health, not just now but into the future. Set boundaries, utilizing your assembled team of pros as a potential buffer should requests become burdensome.
Also, beware and expect that people will approach you with myriad ideas about how to invest your money — many of them questionable. When presented with these requests, leverage your team’s expertise to objectively vet investment and business opportunities before making commitments.
3. Grow capital and expand investment knowledge: Just as athletes should strive to expand their financial knowledge as they notch larger contracts, the same is true for those with newfound wealth. Take an active role in understanding what investment options are available. Your portfolio can mature by moving from traditional allocations, such as stocks and bonds, to more complex investments, including venture capital, real estate or private equity.
While a traditional investment mix of stocks and bonds such as a 60/40 portfolio may have been appropriate prior to receiving the windfall or inheritance, it may make sense to diversify into alternative investments or other business ventures with the assistance of your team. Lean into the experiences of any other affluent family, friends or acquaintances to learn strategies and habits that enabled them to preserve and build their own wealth. They are likely to provide firsthand insight into the potential pitfalls associated with new wealth, helping you to avoid many of the same mistakes they made.
Work to become educated about your investments, including the associated costs and annual maximum contributions. By doing so, you’re more likely to meet your goals. The big takeaway here is to be hands on. Once you’ve assembled your team of financial professionals, be present and inquire about why they’re recommending certain investments.
“Newly wealthy should prepare for ‘sudden wealth syndrome.’”
4. Prepare financially and mentally for life beyond work: Anyone approaching retirement, whether via sudden wealth or as the product of many decades of prudent saving, should take the time to contemplate how they’ll spend time not working. This transition can be fraught with challenges. It can be hard to adjust to moving from a regimented schedule to having ample free time.
It’s important to thoughtfully build an identity and purpose outside of your former career. Just as athletes would be wise to engage former teammates who have successfully navigated the shift from sports to a second career or retirement by building an income-replacement plan, recipients of an inheritance should follow a similar path.
Those who are newly wealthy should also prepare for “sudden wealth syndrome.” Coming into a large sum of money can bring on feelings of anxiety and confusion. Don’t feel ashamed to seek counsel from a licensed therapist who can help you navigate difficult emotions.
5. Pay it forward: A poor grasp of everyday financial concepts can be devastating to anyone’s pecuniary health, but the impact on athletes and other high-net-worth individuals can be particularly pronounced. Many make bad decisions and are ill equipped to preserve and build upon their successes and windfalls for long-term financial stability.
Once you have grown comfortable with your newfound wealth, own the responsibility of passing on that knowledge to your heirs, creating generational wealth and a sound foundation for preserving it.
Justin McCurdy isan executive director and financial adviser at investment firm Manhattan West, specializing in working with entertainers and athletes.
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