By 1996, R&B singer Toni Braxton sold more than 20 million records. Two years later, the Maryland native filed for Chapter 7 bankruptcy—reportedly because of spending too much on shopping.
She was in bankruptcy court again in 2010, claiming debts of up to $50 million.
Whenever fortunes go up in smoke like this, it is often viewed as a shocking turn of events. But many financial advisors are not as surprised, and note cases like Braxton's—where the fortune comes quickly and disappears just as fast—are not as rare as people may think.
“Three reasons suddenly wealthy people don’t hold on to the dollars is not understanding the impact of taxes, lack of foundational understanding of investing, saving, finance, asset allocation, risk reward, diversification and inflation and pressure from family and friends to overspend,” said David Lynch, a managing director and retail head of TD Ameritrade branches.
People in the industry call it “sudden wealth syndrome” and is most commonly a problem with entertainers, professional athletes and lottery winners.
But it’s a problem that can happen with just about anyone who quickly attains great wealth, advisors say.
“Those that plan, start saving early and understand debt and equity can also experience sudden wealth with the money they accumulate,” Lynch told Private Wealth.
Sudden wealth syndrome is a term loosely used to describe the psychological issues underlying the experience of receiving an influx of new or sudden money and the tendency to overspend it.
“They lose it all and we hear these stories in the news,” Lynch said. “It comes down to bad decision making and not having a holistic plan in place.”
For example, one-third of people who received an inheritance had negative savings within two years of the event, according to Federal Reserve and Bureau of Labor Statistics data.
“The worst thing you can do is to ignore the anxiety and the paralysis through analysis associated with sudden wealth syndrome,” said Lynch. “The second thing you don’t want to do is to follow your gut without sound advice.”
One thing that has helped combat sudden wealth syndrome is the fact that it’s easier for people to become knowledgeable about savings and investments, advisors note.
“The Internet is creating access to financial information that was formerly only available to the wealthy,” said Lynch. “Comfort around money comes from having a good understanding of the markets, economics and finance.”
Some 71 percent of Americans said they would be set for life if they received millions of dollars, while 26 percent said they wouldn’t necessarily be set for life, according to a TD Ameritrade survey of 1,006 Americans.
“Proper preparation and educating yourself ahead of receiving sudden wealth is key,” Lynch said. “And don’t rush into major decisions once you receive it.”
Midwesterners lead in fiscal responsibility, with 62 percent saying they would invest a sudden windfall compared to 52 percent in the Northeast and 57 percent across the country, according to the survey.
“In places like Omaha and St. Louis, investors are more likely to value saving and investing rather than depreciating assets, which you don’t see much of on either coast,” Lynch said. “The Midwestern mentality, culture and work ethic contribute to this conservative ideology.”
