How to Manage a Windfall
Looking for a trusted network of high-net-worth peers? Apply now to join Long Angle, a vetted community of high-net-worth investors, entrepreneurs, and professionals. Access confidential discussions, live events, peer groups, and private market deals.
Table of Contents
Managing Privacy and Personal Relationships
The Psychology of Managing a Sudden Windfall
How to Manage a Windfall: Practical Steps
Acquiring vs. Preserving Wealth Post-Exit
Finding the Right Windfall Strategy
When someone suddenly comes into significant wealth, the immediate task may seem to be all about financial management, but the true challenge is much deeper. A financial windfall—whether through winning the lottery, inheriting wealth, selling a business, or any other means—also brings up emotional, psychological, and relational challenges.
If handled poorly, these challenges could negatively impact not only one’s financial future but also one’s sense of self and relationships with others. Knowing how to manage a windfall requires a multifaceted approach that goes beyond traditional financial advice.
Managing Privacy and Personal Relationships
One of the first considerations after a windfall is whether or not to share the news with others. And, for those who do want to share, who can be trusted with this information?
Individuals who have experienced sudden wealth often recommend keeping a windfall private or only informing close friends and family. The reasoning is that when others are aware that someone has wealth, it opens the door to a wide range of problems—jealousy, expectations, and even requests for financial support. The sudden nature of a windfall exacerbates these effects, potentially causing friends, family, and acquaintances to either struggle with the change or see it as an opportunity for personal gain.
This can be a problem even with close relationships. Friends or family members may make requests for financial help, and refusing could strain the relationship. Others might feel insecure because of the discrepancy in net worth. For example, high-net-worth individuals often report that dating those with significantly less wealth can be tricky due to the insecurities it brings up.
Keeping a windfall under wraps allows important relationships to continue as-is without introducing extra tension. Still, some take a more relaxed approach. Family and friends may suspect something has changed if they observe changes such as traveling more or buying a new home. Some who experience a windfall would prefer to be open and transparent if asked, and not everyone experiences negative reactions.
This is a delicate situation that requires the individual to consider the nature of their relationships and who they feel they can trust. Certainly, no one experiencing a windfall should feel obligated to share the news more than they are comfortable with.
People who gain money through entrepreneurship or other ventures are less likely to face resentment compared to those who come into wealth without appearing to have “earned” it (i.e. someone who wins the lottery or inherits wealth from a relative). For those with “unearned wealth,” managing relationships can be particularly challenging. Without the reputation of success that comes with building wealth from scratch, others might undervalue personal achievements. Regardless of how someone comes into wealth, the most important thing is how they then choose to use and manage it.
The Psychology of Managing a Sudden Windfall
Whether it is a fear of market crashes, impulse spending, or the desire to keep up with others, everyone has their own psychological "demons" to face, and sudden wealth has a way of bringing these tendencies to the surface. For example, some people hesitate to invest their money due to anxiety, while others might spend frivolously now that they can afford more. It is important to be honest about any bad financial habits that a windfall could amplify and take steps to prevent these tendencies from causing problems.
There are many misconceptions out there about high-net-worth individuals, including viewing them as selfish or frivolous. This is an unfortunate stereotype, and gaining wealth is best viewed as an incredible opportunity for growth that makes it possible to achieve goals and live authentically. Still, a sudden increase in wealth can indeed go to some people’s heads. It is important to stay grounded, self-reflect, and be intentional with spending choices.
Many people actually find that once they have financial security, they start to value the simpler aspects of life—such as good health, time spent in nature, and being present in the moment—more than material goods. While everyone should spend their wealth in a way that is meaningful to them—whether that means investing in real estate, purchasing cars, or traveling—appreciating small pleasures that do not have a price tag is a great way to stay grounded.
How to Manage a Windfall: Practical Steps
Insurance and Safeguards
With increased wealth comes increased risk. Insurance needs will likely change, and it is important to ensure that all aspects are adequately covered. This includes upgrading home, renter, auto, health, and umbrella insurance. Uninsured motorists, lawsuits, and other unforeseen risks could potentially threaten assets, so making sure full protection is in place is crucial.
The potential for lawsuits also becomes a much larger concern. People may target assets in litigation, which makes umbrella insurance particularly important. This coverage protects financial assets in the case of lawsuits or large claims against the insured. Adequate and thorough insurance promotes peace of mind and reduces the stressors associated with learning how to manage a windfall.
Beyond insurance, consider other wealth protection strategies. A diversified investment portfolio aids with risk management, and legal structures such as trusts can offer further protection and help with estate planning.
Monthly Income vs. Lump Sum
Many individuals who have experienced sudden wealth advocate for receiving it in the form of monthly income rather than a large lump sum. This creates a steady, manageable flow of money that allows for greater flexibility without the pressure of managing a significant amount all at once.
A large lump sum can be overwhelming, making it easy to make impulsive or poorly thought-out decisions. Monthly distributions can help prevent this, giving time and space to consider each financial decision carefully. This method of windfall wealth management also provides a buffer against making large, risky investments that could jeopardize one’s financial security.
Another option is receiving a windfall in tranches—larger, periodic payments over time. This approach combines elements of both lump sum and monthly income strategies, offering flexibility while still providing some structure to help manage the influx of wealth.
How to Invest a Windfall
Some recommend taking some time—at least a year—before making any major financial decisions after a windfall. This cooling-off period allows time to adjust to the new financial reality and make more thoughtful decisions about significant expenditures. For windfalls that come unexpectedly, this might be appropriate advice, but often, a windfall does not come out of nowhere. For example, someone selling a business will have had ample time to consider their options and plan ahead for how to allocate the windfall gains.
Many follow the advice of businessman Kevin O’Leary, who recommends investing the principle and leaving it alone but spending the dividends as desired.
When considering “fun” purchases (such as cars, art, or jewelry), it is wise not to spend more than 1% of the total money received. A much larger amount could be allocated to areas such as personal real estate, as these investments retain value and often appreciate.
When it comes to existing debts, prioritize paying off high-interest debt (such as credit card balances). One should consider keeping low-interest debt (like a mortgage with a rate below 4%) if they are confident that their investment returns will exceed the interest rate.
Those who experience a windfall are usually already financially savvy with a strong investment portfolio. Increased wealth opens the door to new opportunities, such as alternative investments that can do wonders for diversifying a portfolio and bringing in impressive returns.
Choose Financial Advisors Carefully
While financial advisors can be instrumental in managing a windfall, it is essential to keep a close eye on their work. Mistakes can happen, and if they do, the individual is ultimately the one who bears the consequences. Windfall recipients need to review filings and forms, ensuring that everything is correct before submitting. A professional may not catch every error, and unchecked mistakes could lead to costly problems down the road.
A sudden windfall may feel overwhelming, forcing one to consider financial decisions at a scale they have never needed to think about before. This can, unfortunately, make windfall recipients vulnerable to financial advisors who might have different motivations. Financial advisors and other experts may be incentivized to make decisions that increase their billable hours, even if it is not in the best interest of their clients. Stay informed, triple-check that goals are aligned, and don't blindly delegate everything—especially in the beginning.
A tax accountant will also be a huge help when adjusting to a windfall finance strategy, as will an estate planner.
The Importance of Financial Literacy
While working with professionals can be invaluable, it is the responsibility of the individual to become financially literate and learn how to manage wealth wisely. Dedicate time to understanding investments, taxes, and basic financial principles. Consider taking courses, reading reputable financial books, or attending seminars to boost financial acumen.
High-Net-Worth Income & Spending Report
Long Angle's annual High-Net-Worth Income and Spending report analyzes income sources, expenses, savings strategies, and spending behaviors of high-net-worth households.
Acquiring vs. Preserving Wealth Post-Exit
For many who come into wealth through entrepreneurship, the skills they developed in acquiring that wealth are very different from the skills needed to preserve it. Building wealth often involves taking concentrated risks and investing heavily in a single business or opportunity. However, once wealth is acquired, the focus must shift toward preservation through diversification and asset allocation.
A conservation mindset focused on wealth preservation prioritizes safeguarding newfound wealth over pursuing high-risk, high-reward investments.
Diversification is critical to preserving wealth. Some individuals who have successfully built businesses take unnecessary risks by not diversifying their investments, which can lead to financial setbacks. Understanding the distinction between acquisition and preservation is key to long-term financial security, ensuring that wealth not only grows but is also protected for the future.
Finding the Right Windfall Strategy
When deciding how to manage a windfall, a holistic approach is needed. A windfall, especially a sudden one, is incredibly exciting but can also feel overwhelming. Focusing on personal growth, relationship management, and smart financial decisions increases the odds of successfully navigating the complexities that come with newfound wealth and building a secure, happy life.
Tad Fallows and Sriram Gollapalli formed Long Angle after receiving a windfall from selling a software business. They created Long Angle to build a space where like-minded individuals can openly discuss topics that affect high-net-worth individuals. Both have spoken extensively about their post-exit strategies on podcasts such as Exit Paradox and After the Exit. Join Long Angle to become part of this diverse community.
Looking to expand your investment network?
Join Long Angle, a private community of high-net-worth investors. Together, we leverage our collective expertise and assets to access, diligence, and underwrite institutional-quality alternative investments.
