I’m Rich, Now What
By AJ Ayers, CFP, EA, CEP
As a firm, Brooklyn FI has helped more than 200 clients through a life-changing liquidity event. What feels like every day, our clients go through the experience of going to sleep holding some stock options that have perceived value to waking up with seven figures in their checking account. (Emphasis added for dramatic effect!) This is all to say, we have a lot of experience in the emotional ups and downs of waking up one morning with millions.
It’s something most people only dream of: become a millionaire overnight. It’s the stuff of dramatic plays and literature. Crimes are committed daily towards this end. In the cases we see, no crimes were committed, no lottery jackpot was won. Most of the money we see flowing into our clients’ bank accounts comes from an IPO or acquisition of a company they’ve worked at for a few years, or the sale of a business they own.
A few weeks ago there was an anonymous NY Mag story published that I loved called “confessions of an overnight tech millionaire.” The author wrote a brilliant piece about the way she feels about her company going public (it’s strange, her life actually doesn’t change that much, she’s struggling with how to spend her millions) and I’ve seen those same sentiments echoed in client meetings and emails over the years. You might consider this post a response to that piece, from the perspective of a financial planner who has been through this shit with clients a bunch of times.
Now depending on the size of your exit, this could be LIFE-CHANGING money. Ask yourself this: whose life are you going to change? Most people will choose themselves, or their families, but with some highly successful exits, there’s an opportunity to change the lives of family members, their community, and even have a greater impact through charitable giving. The author of the “confessions” piece chose to splurge on doggy dental work for her beloved canine friends.
The thing that’s funny about money is that it can do so much. This is why I want you to take time and reflect and think about what really matters to you. A million dollars can buy a lot of things: a one-bedroom apartment in Brooklyn, financial security for a struggling family member, a Harvard education for twins, a school for an entire town in some parts of the world, desperately needed dollars for medical research into a disease that’s personally affected you, or early retirement to a beach somewhere.
There are psychologists and estate planners who have decades of experience in this area that I’ll point you to. Two books I really love are Strangers in Paradise by James Grubman and Generation Impact by Sharna Goldseker and Michael Moody.
This is by no means a comprehensive guide but here are some steps to take once you’ve gone through a liquidity event.
The 5 step plan for handling your new wealth.
Accept it. You’re wealthy. You’re probably richer than most people you know. You’re probably richer than your parents. You’re probably richer than your roommates, your significant other, and your best friend. That’s weird. This puts you in a strange position of power and feels very very weird to most people. Let your new reality wash over you and read about the experiences of others (see the books mentioned above). Which brings me to step 2.
Wait. You don’t need to do anything right now. It might take a few weeks or months for this to sink in. You might feel pressure from external forces and the sharks in your company Slack channel to GET IT INVESTED right away but you need to ignore that feeling. Yes, you should invest the money, any financial planner will tell you that but I think it’s okay to wait just a little while to make sure you’re ready. The market will still be there in a few weeks. If you’re super anxious about getting the funds invested, sure, go ahead and invest 10% now, but careful planning is crucial at this moment. This isn’t a few thousand dollars in a savings account, this is life-changing money. You don’t need to rush this decision and you most certainly don’t need to buy a house right now. In fact, you need a solid and carefully constructed financial plan and you should probably make that plan and sit on it for a few months before taking action.
Don’t try to DIY this. When prospective clients reach out to us, we can usually tell instantly if it’s a great fit. Most of our clients, they’ve never had a financial planner before and paying thousands of dollars for tax and investment advice seems INSANE. What’s actually INSANE is having the hubris to assume that you can figure this out on your own. We correct errors made by individuals, other accountants, and most terrifyingly, the brokerage firms that report the transactions. When someone who I think is a great for Brooklyn FI doesn’t hire us, my heart actually breaks because I just know that by not hiring us, they are missing out on potentially hundreds of thousands of dollars in taxes paid, not to mention the priceless feeling of having someone share the burden of this new stress. Highly-paid software engineers are incredibly sharp and I’ve seen some awesome homemade spreadsheets. But at the end of the day, asking an expert to help you navigate something you’ve never done before is the smart thing to do. An IPO is dramatic and exciting but the real wealth is created in the months and years afterward with a carefully managed tax-efficient diversification strategy. Reddit is not a financial plan, nor is your company Slack channel.
Pay your taxes now because you’re going to owe them anyways. This one is perhaps a bit controversial in that most financial planners will likely tell you to estimate your tax liability and then save the money in a high yield savings account. My colleagues and I at Brooklyn FI have recently been recommending that our clients just pay the taxes owed at the time of a large sale. We can debate all day about the opportunity cost of a high yield savings account (at current interest rates, it’s nothing special) versus paying the IRS sooner than you need you but going through multi-year Alternative Minimum Tax seesaw games with our clients have left us all a bit jaded. The emotional stress of knowing that a huge chunk of your balance sheet isn’t really yours can taint your entire first year of experiencing this new wealth. Really good financial planning is a delicate balancing act between what’s best for a lower tax bill, long term wealth, and short term sanity.
Do some good. It will do you more good than you know. I saw psychologist Elizabeth Dunn speak about money and happiness at a conference a few years ago and was blown away by what she had to say. Her team did a Harvard research study called “Feeling Good about Giving: The Benefits (and Costs) of Self-Interested Charitable Behavior” which later became a book. I’m butchering this terribly but the gist is that money does buy happiness up to a certain point (I think it was somewhere around an annual income of $75,000) and then after that, it’s up to you to create your own happiness and one of the best ways to do that is by charitable giving. Here’s a striking sentence from her study: “At the most basic level, functional magnetic resonance imaging (fMRI) evidence shows that giving money to charity leads to similar brain activity in regions implicated in the experience of pleasure and reward.” We generally recommend that clients make a small donation of both money and time to cause they care about very soon after a liquidity event.