Sudden Wealth Mental Accounting

Regardless of the source of the money, logically, we know the value is the same, but somehow, a dollar we earn is “worth” more than the dollar we find. Research shows that those who won money in a radio contest were more likely to spend the money than those who earned it by working overtime . Psychologists and behavior economists have coined a term for our tendency to value money differently. They call it “mental accounting,” and as a sudden wealth recipient, you need to understand how this limiting money belief can cloud your judgment and ability to make good financial decisions.

Mental accounting describes our tendency to treat money differently, depending on its source. Sudden wealth recipients who fail to appreciate the real effects of mental accounting can suffer enormous consequences – the money that came overnight can disappear just as quickly. A good deal of my work as a sudden wealth advisor is helping clients avoid valuing money they receive from lottery winnings, lawsuits, inheritances, or other sudden wealth events as less than money they earn through their labor.

It’s important to note that even if you didn’t win your sudden wealth in a lottery, it did come to you overnight. Because it is such a large amount, it can feel “found” or even unearned. One client who received a large settlement check called it “funny money,” even though he lost a family member and spent years battling for justice. Clients who have lost close family members and received an inheritance have told me that logically, they know that, but they couldn’t help but view a bank statement with all of the digits as anything but “Monopoly money.” Whether you have won the lottery, received an inheritance, been issued a judgment/settlement, signed a sports/entertainment contract, exercised stock options, or sold your business, if you think of this money differently or somehow worth less than your savings or money you’ve earned, the consequences can be enormous and dramatic.

If you think that sudden wealth will never happen for you, think again. A major financial windfall can come from unexpected circumstances when you least expect it. Read about the San Francisco bartender who became a millionaire overnight on USA Today: Bartender Finds $20, Buys Winning $1 Million Lottery Ticket.