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.”