It’s the dream for a lot of people isn’t it – win the lottery, retire and live a life of luxury. But for a lot of people, once that money hits their bank account, something goes wrong and it eventually slips through their fingers leaving them with nothing. So why do people end up poor after they’ve received a large sum of money?
They were poor, to begin with.
If you’ve never had a huge sum of money and have always had to watch every penny, suddenly being wealthy can be overwhelming. There can be all sorts of emotions that go with that, one of which is a subconscious feeling of guilt. Yep, a poor-turned-rich person can feel so guilty about having wealth that they don’t feel they deserve it and then blow the lot.
A poor person may also go a little nuts on buying all the things they’ve been denied all this time. They buy the things they’ve been dreaming of, like the nice, big house, or the flashy sports car. The trouble with big purchases like this is that the maintenance and upkeep costs can quickly rip a hole in the bank account.
The trouble with people who were poor, to begin with, is that they have no idea how to handle large sums of money as they’ve never been in that position.
They spread the love because money buys happiness, right?
Of course, someone might want to treat their friends and family once they gain sudden wealth. That feeling of happiness when you’ve paid off a loved one’s mortgage will keep you cozy at night. But money can add up pretty quick when you’re splashing the cash. And if a person suddenly finds themselves popular, they can get carried away with this. Until the money is gone and then they realise that their popularity had nothing to do with them, just their bank account.
Bad advice, bad habits, and bad decisions.
If a person is not very wise when it comes to money and tends to burn through their normal money, then they’re going to be a lot worse when they get a large lump of it.
That person is also most likely to be surrounded by people who also wouldn’t know how best to manage that money but that doesn’t stop them from offering advice. But it is most likely bad advice.
Coupled with bad advice, bad decisions, and a compulsiveness to buy things, then it’s no wonder money can drain away quicker than you can say ‘I’m a millionnaire’.
They lose a sense of purpose
It’s the dream isn’t it, to win the lottery and tell your boss you quit and then never have to work again. But what happens when you do quit? Perhaps all your friends still work so you get bored during the day and they are too busy to do anything in the evenings. So you spend your days doing what? Spending your money most likely as you try and fill the void of the aimlessness of your life.
So what can you do if you suddenly find yourself wealthy?
Put that money aside and wait.
This is probably the hardest thing to do but it makes sense to get used to having a large amount of money in your life and let the shock wear off. Give yourself time to plan what to do with it and to make sure that you’re not acting impulsively. You’re more likely to make sensible decisions once you’ve had time to think about things.
The only thing to consider straight away is clearing off any bad debts and paying for anything that is in desperate need, i.e., a new washing machine as your one is on its last legs.
Pay off bad debts.
There are good debts and bad debts. The one thing you should look at doing once you’ve got your money, and contrary to the advice above, is to clear off your bad debts.
Good debt is one that will benefit you over time and will eventually improve your financial position.
- a mortgage
- a student loan (an investment in your future career)
- a consolidation loan (it improves your financial position from your bad debts though still a good one to clear when you can)
- a small business loan (an investment in something that should bring you in future earnings)
Bad debt is one that will not help improve your financial outcome in the future and is usually spent on something that has no value or will lose its value as soon as you buy it. Bad debts tend to cost you money as you’ll be paying interest in addition to the debt.
- credit card debt
- car finance (your car loses value as soon as you leave the dealership)
- payday loans
Get professional financial advice.
Seek the advice of a professional who is used to advising wealthy clients. The advice of ‘your mate from down the pub’ could cost you your fortune, suck up the professional fees and heed the professional’s advice – it’s an investment in your future wealth.
Change your mindset.
Something I have observed from a lot of wealthy people is that they don’t spend their money. They are frugal to the last. They will buy the supermarket’s own brand of baked beans and use a coupon to get a discount. Their mobile phone wouldn’t look out of place in the 90s and their clothes are worn until the holes in them become too much.
Okay, so you don’t have to be that strict but it would pay to learn not to be materialistic. If you’ve ever been in a position where you’ve had to sell your possessions to survive then you soon realise that you could have lived without most of them in the first place. Possessions don’t matter than much in the grand scheme of things. Aim to be a minimalist and carefully consider whether you really need the latest iPhone or designer label clothes.
Make a rainy day fund.
Put aside some money and keep it safe. That is there for emergencies and train yourself not to dip into it. Aim to keep adding to it. If you lose your job, then unless you have enough wealth to keep you going until retirement, you’ll soon find your money slipping away and that rainy day fund is the buffer between you being able to eat or not.
Have some fun but don’t throw all caution to the wind.
We all know you can’t take money with you when you die so you don’t want to sit on all your money and live in misery. You can live a little! But learn to be cautious and spend your money on things that will truly enrich your life. Money can’t buy happiness but it can give us the means to live a life that is happy.
Don’t make too many drastic changes to your lifestyle.
If you can maintain your current lifestyle then you’re not going to blow your money. If you start spending like there’s no tomorrow then you’ll run out of money pretty quick. If you’ve cleared off some debts then that should leave you with extra money to spend on what you want without having to dip into your newfound wealth.
It is all too easy to start blowing through large sums of money as it can seem infinite at first. It’s important to rein your impulsions in and retain some sense of sensibility. Give yourself plenty of time to mull your choices over and get professional advice.
If you know you’re going to want to be frivolous, try setting a budget for the amount of money you’ll allow yourself to blow and lock the rest of the money away out of temptation.
You’ll need to find a balance between living for the now and enjoying your new fortune and planning for the future.