Sudden wealth can be an exciting and overwhelming experience. Whether you’ve sold a business, received an inheritance, or won a large sum of money, the opportunities are endless. 

But if you’re, like many high-net-worth individuals, this sudden influx of money also presents some critical decisions that need careful consideration.

As a Certified Financial Planner (CFP®), I have worked with clients who’ve suddenly found themselves managing significantly more money than before. In this article, I’ll walk you through the best investments for sudden wealth and how to navigate these new financial waters with confidence.

The First Step: Don’t Rush

Take a Breather

Sudden wealth comes with both excitement and stress. You might feel pressured to immediately invest or spend your newfound money, but it’s crucial to take a moment to assess your situation first. 

In fact, I always tell my clients to “sleep on it” for some time (even a few weeks) before making any major decisions. This breathing room allows you to make thoughtful, deliberate choices instead of emotional, reactive ones.

For example, you don’t want to end up inheriting $2 million and losing nearly half of it by diving into risky investments without a plan. Taking the time to carefully evaluate your financial situation could prevent costly mistakes.

Assess Your Financial Situation

Build a Safety Net First

Before investing, ensure your financial foundation is solid. You want to have enough liquid savings to cover 6 to 12 months of expenses. 

If you haven’t already built this safety net, now is the time. Check out our post on emergency savings goals for guidance on how much you should save and why it matters.

Pay Off High-Interest Debt

It’s tempting to jump into the stock market, but first, take care of high-interest debt like credit cards. There’s no better “investment” than eliminating a debt that costs you 15% or more in interest each year. 

Paying off high-interest debt is like getting a guaranteed return on your money, which is hard to beat with any other investment.

Consult a Financial Professional

At this stage, it’s wise to bring in a financial planner or tax advisor to review your complete financial picture. You’ll need someone to help you navigate the complexities of sudden wealth, such as estate planning, taxes, and the best ways to grow your money.

Understand Your Risk Tolerance

Age and Risk Tolerance

Your age and stage in life play a major role in your risk tolerance. A 40-year-old with decades until retirement can afford to take more risk than a 65-year-old nearing the end of their career. It’s important to think about how much risk you’re willing and able to handle.

If you’re unsure about your risk tolerance, start by taking a risk tolerance questionnaire with your planner or advisor. This will give you a clearer picture of whether you should invest in high-growth stocks, bonds, or a balanced mix.

Tax-Efficient Investments

Maximize Tax-Deferred Accounts

One of the biggest mistakes I see people make when they come into sudden wealth is ignoring the tax impact. When you find yourself in a higher tax bracket, taxes can eat away at your wealth if you’re not careful. 

That’s why it’s crucial to use tax-deferred accounts to shelter as much of your wealth as possible.

If you haven’t maxed out your IRA or 401(k) contributions, now is a good time to do so. For more tax strategies for high earners, check out Maximizing Your After-Tax Returns.

Tax-Efficient Investments

Invest in tax-efficient vehicles such as municipal bonds, which generate tax-free income. You could also consider index funds, which have lower turnover and tend to be more tax-efficient than actively managed funds. 

Strategies like tax-loss harvesting can also help you minimize capital gains taxes on your investments.

Diversify and Allocate Wisely

Diversification is Key

With sudden wealth, it’s crucial to diversify your portfolio. You want to spread your money across different asset classes, including:

• Stocks: These offer the best growth potential but come with more risk.
• Bonds: Bonds provide stability and can generate income.
• Real Estate: Real estate can provide a hedge against inflation and offer both income and appreciation.
• Private Investments: If you qualify as an accredited investor, you can also explore private equity and hedge funds to diversify further.

Check out our guide on common mistakes to avoid when saving to ensure you’re not falling into the usual traps of over concentration or lack of diversity.

Age-Based Asset Allocation

Your age will also guide how you allocate your investments. If you’re in your 40s or 50s, you can afford to have a larger portion of your portfolio in stocks for growth. 

However, if you’re nearing retirement, it’s best to shift more into bonds and real estate to protect your wealth. Asset allocation strategies can vary significantly depending on your age and personal financial goals.

A rule of thumb to start the thought process around asset allocation is to subtract your age from 100 and this will provide you with a baseline for how much equity you should have in your asset allocation. For example, if you are 55 we will consider your starting place for equities at 45%. 

Therefore, as your age gets closer to 100 you will be reducing the amount of equity investments in your portfolio. 

Protecting Your Wealth with Estate Planning

Set Up a Trust

If sudden wealth has significantly increased your estate, you may want to consider setting up a trust. Trusts not only protect your assets but can also help you minimize estate taxes and ensure your wealth is passed down according to your wishes.

If you’re not sure when to create a trust, our article on asset protection can help clarify the right timing for your situation.

Life Insurance

A large sum of wealth can change your life insurance needs. Your lifestyle may increase; as well as, your assets potentially causing the need for increased life insurance.  

You may want to increase your coverage or explore other types of policies, such as term or whole life insurance. 

Life insurance can help protect your family and provide liquidity in case estate taxes or other expenses arise after your passing.

Gifting and Philanthropy

If you’re feeling charitable, you can use your wealth to give back in a tax-advantaged way. Strategies like donor-advised funds (DAFs) allow you to donate to your favorite charities while receiving immediate tax benefits.

For high-net-worth individuals, charitable trusts can be an effective way to give while also lowering your estate taxes.

Work with a Financial Planner or Advisor

Finding the Right Planner

Managing sudden wealth isn’t something you want to do alone. A financial planner can help you create a comprehensive financial plan that ensures your money is working for you, not against you. 

Look for an advisor who is a CFP® and has experience working with high-net-worth clients. They can guide you through everything from tax strategies to estate planning.

If you’re looking for more on fee-only models and why they’re beneficial, read about the importance of working with a fee-only advisor in this post.

What’s Next: A New Chapter…Opportunity

Sudden wealth can open doors to a whole new level of financial freedom, but it also comes with risks and responsibilities. By taking the time to assess your situation, understanding your risk tolerance, and diversifying wisely, you can grow and protect your wealth for the long term.

If you’re ready to build a strategy tailored to your situation, consider speaking with a financial planner who specializes in sudden wealth management. This ensures your wealth not only grows but is preserved for future generations.

Start your journey with confidence, visit A Small Investment Insights for more expert advice on maximizing your financial opportunities