Perils of sudden wealth

Ever met someone who came into a huge windfall from an inheritance, their company was bought out for millions or they won the jackpot at the lottery?

Every day some lucky blighter pockets a fortune. Astoundingly, it slips through the fingers of most in a remarkably short time. It is said that in five years, 85 per cent of people who come suddenly into wealth are back to where they started.

While we would like to hear that it's because the strain of managing the new-found wealth makes people desperately unhappy, University of Canterbury psychology professor Simon Kemp says this isn't so.

Having said that, it doesn't make the enormous difference you might expect.

"In the long run, after about a year or so, it makes very little difference. You get a spike of happiness then you settle back down to where you were," says Kemp.

The first few weeks after a windfall commonly involve sleepless nights. It's the shock and all the possibilities, says the NZ Lotteries Commission, which hands out a self-help booklet to its dazed winners and sends them on their way.

The choices which become available can at first be dazzling and then downright exhausting. Life becomes more complex than the usual grind of meeting mortgage payments. You can now choose what kind of car you would really like and whether you should fly business or first class.

A windfall "challenges all the parameters of how you live", says Dennis Pearne, author of The Challenges of Wealth in a recent MSN Money article. "It changes what you do, what you no longer have to do, where you can live, how much you can travel. So much changes so fast that it can be terribly overwhelming and some people go into money shock."

Susan Bradley, a financial planner and founder of The Sudden Money Institute in Florida, has found in her research that people suffer the same shock from gaining wealth as they do from losing it. The feelings of confusion are all about the sudden shift in circumstances, she says.

Some people find sudden wealth is too much trouble.

Anne Hartley, Australian life coach and author of books including The Psychology of Money and Financial Freedom, says she can tell when a client is going to get rid of their money as fast as they can because it bothers them.

Richard Bach, the author of Jonathan Livingston Seagull, is an example of someone who could not handle his sudden wealth, she says. "He was travelling around promoting his book and the money was going into his account in its millions. His balance went from zero to a million and he did not know what to do with it, so he gave it away to other people."

She gives another example in Financial Freedom, of a woman who, used to struggling and having no money, had come into some funds through her divorce. She came to Hartley to talk about investing the $30,000. As she left she said: "I wish I didn't have this money. It's more trouble than it's worth."

"I knew then she would sabotage herself," Hartley says.

Another 12 months later, the woman rang. Her car had been demolished in an accident and was not insured. She had gone from fulltime work to part-time while she figured out what kind of work she really wanted to do.

"Within two years, [she] had no money left and was back to her old comfort level," says Hartley.

Possibly the classic recent case of huge wealth slipping through the fingers is that of Michael Carroll, Britain's most infamous lottery winner. Dubbed the Lotto Lout by the British press, Carroll has disposed of around £8 million ($22.9 million) in four years. He says he spent roughly £1 million on drugs and gave away around £4 million, mostly to his family. He's been blackmailed, addicted to crack, spent nine months in prison for terrorising patrons at a Christian disco, and has now written a book, Careful What You Wish For.

Of course, there are some happy fortune holders out there who manage the sudden cash injection well.

Monica and Gary Stevenson sold their company a couple of years ago for millions of dollars and it is still sinking in, says Monica. The sale came after five hard years of building the company up and living in premises over an office in Wellington with two young children. When the money was handed over it took some digesting.

"We looked at the bank account a hundred times," she says.

"I thought, we are lucky and why are other people not this lucky? It was quite surreal. I think, okay, now I am responsible for so many more people. You go through this thing of thinking, now I've got to help everybody."

One of her immediate reactions to the news was embarrassment and this was largely due to her family's reaction. "I come from quite a traditional family with three brothers and they were the ones who were meant to be successful," she says. "My parents and brothers didn't know how to take it."

The couple gave money to each family member so they could buy a new house.

Her parents tell her off for wasting her money when she buys a piece of jewellery, which she finds hurtful.

With a third child, Monica does not work outside the home and she has a nanny to help.

"I still feel guilty that I'm not working," she says.

Monica says one of her main concerns is that her children stay grounded and do all the things she did growing up, like taking part-time jobs as a teenager.

With Gary being a capable businessman and financier, the family has not had any trouble putting together a diversified investment portfolio.

"Money is not everything but it helps. It's a big bonus. I find that because you can buy everything that you want, you don't get the buzz that you got when you saved for it for three months," she says.

People like tradesmen and interior designers try to rip you off because they know you have money, she adds.

Often the newly wealthy find they are separated from their peer group, which is disorientating.

"We have not changed - I'm just myself. Some people are embarrassed for me to go around to their house. I just think we are very fortunate and stay grounded.

"We have never taken it for granted but I think that's because we did not get the money on a platter."

For those who experience a windfall, and don't have the financial background, there is plenty of good advice out there.

The first is, don't do a thing for at least six months. Just stash it in a fixed-interest account and give yourself time for the news to absorb.

Some will start thinking about leaving a legacy.

"On $10 million you can live nicely, on $50 million it's more than you need - then you can think about the legacy you will leave," says Jeff Matthews, senior finance adviser at Spicers Wealth Management.

What many newly wealthy do is make mistakes and take the wrong advice if they don't pause for breath.

Sudden wealth can drive a wedge between couples. If one wants to spend money on one thing and the other wants to squirrel it away, this can cause problems, says Fiona Calderwood, from Calderwood Chartered Accountants.

Gift duty is something that the newly rich soon learn about. If you give away more than $27,000 a year, you must pay gift duty. What a lot of people do is give loans which they never envisage being repaid, says Kay Caverhill, senior solicitor with Callaghan & Co.

Of course, one way to avoid the extended-family pressure for handouts is not to tell anyone of your good luck, although this is sometimes tricky if you've been on television accepting your Lotto prize.

Martin Hawes, wealth coach and financial author, says if it happened to him he wouldn't tell a soul. "I would just pretend and go on doing what I was always doing," he says.

There are ways to assuage the guilt when spending that new-found money, he says. "I am a big believer in dividing up money."

He believes you should allow yourself to do something silly with a small portion of it, then with another portion buy a car or a boat, and invest the rest sensibly. This of course requires some thought and is another reason why you should wait at least six months before doing anything.

Finding an adviser you trust is absolutely crucial at times like this. There have been many cases of middle men who fleece inexperienced new investors.

One Lotto winner in Australia won $6m and gave it all to his accountant to invest. He put it into managed funds that paid him the highest commission and the advice made him about $300,000.

Professional athletes seem to excel in taking the wrong financial advice, usually trusting their managers too much. "You hear about managers who take on a financial management role for athletes but don't have the skills themselves," financial adviser Lisa Dudson says.

Former All Black Grant Fox, who missed out on the big bucks when he played, says he wouldn't want to be under the spotlight in the way the All Blacks are now.

He warns that sooner or later the high-rolling finances of young professional athletes such as the All Blacks will lead to a disaster or two.

"There are going to be some train crashes in the years to come. If you look at pro-sports and the large sums of money involved, there's been some bad stories there. It hasn't happened here yet but it will."