As a financial advisor, tax expert and an attorney that deals in estate and business planning, I usually blog on things that relate to building and maintaining wealth. But one area of wealth management that always amazes me is how people who get a large inheritance or sell a business for a lot of money can do so many foolish things that ultimately make them “un-wealthy.” And while the lessons learned are important for anyone who acquires sudden wealth, they can also be a cautionary tale for someone who spends years accumulating wealth.
Certainly, we often see examples of this amongst rock stars, professional athletes and movie stars. However we rarely see self-made successful business owners worth hundreds of millions of dollars file for personal bankruptcy. That is what makes the situation regarding the founder of C/NET, Halsey Minor, so fascinating. Five years after he sold his technology company for a crisp $1.8 billion he filed for personal bankruptcy.
When movie stars, performers and athletes file for bankruptcy we shrug it off as another example of a “dumb jock” not being able to handle their finances. That can’t be the reaction when it happens to someone like Halsey Minor, an educated entrepreneur. Surely something different has happened.
When someone so successful, and so rich, files for personal bankruptcy, you certainly wonder how they could have spent all that money. In Minor’s case, living a more-than lavish and extravagant lifestyle was the culprit. Those extravagances included a world-class art collection, a historic mansion on a plantation in Virginia, horse farms and even a piece of contemporary designer furniture worth more than $2 million. In addition, he made some bad business investments in start-up companies that cost him a huge chunk of his wealth.
While this may seem like an extreme example of someone who went overboard in their spending, it does help illustrate a few important points, whether you have accumulated sudden wealth or are retiring and will live off of your investments:
-Live Within Your Means – This old cliché couldn’t be more prophetic when it comes to sudden wealth or retirement. It is important to remember that any new-found wealth isn’t a continual revenue stream; rather it is a lump sum that will dwindle to nothing if you start to overuse it as your only source of income to maintain an extravagant lifestyle. Unless you plan to continuing working to generate more income, living conservatively can help to maintain and prolong your wealth.
-Sudden Wealth Doesn’t Make You Smarter – Too often, people who accumulate sudden wealth begin to delve into other businesses and investments that are outside their knowledge base. That can often be the result of believing that now that you are rich, you have the golden touch when it comes to various investments. But just because you love fine-dining and always wanted to own a restaurant, or love wine and think you should buy a vineyard, doesn’t mean it is the right thing to do. And often, these excursions lead to a great loss of wealth, not an increase.
-Avoid Friends and Relatives Who Want a Piece of Your Wealth- While your sudden wealth can be used to help family members with some of their financial needs, beware of people who look at you as a funding source for their “next big thing” ideas. So when your golf buddy tells you he has invented a golf ball that will never slice, or your brother-in-law wants you to invest in his start-up company that has failed to start, be wary. It is not unusual for people who accumulate sudden wealth to fall prey to these types of requests—and regret it later when they have lost thousands or millions of dollars in the process.
-Get Help from a Professional – Even if you are a financial advisor or a CPA before you become suddenly wealthy, it is always advisable to let trusted financial professionals help you with tax and investment strategies that will keep your wealth in-tact and may even be able to make it grow safely. Remember, the consequences of not doing things properly when it comes to taxes, investments and estate planning are much different for the rich than those with lesser means. Take advantage of your sudden wealth to hire the right experts to help you.
Remember the feeling you had when you sold your business for a tidy profit or were lucky enough to inherit a few million from your favorite aunt? To continue to have that good feeling about your sudden wealth means you need to remind yourself how lucky you are and make sure that you do everything in your power to maintain your funds, not deplete them.