A typical professional athlete may be a prime example of the situation in which an individual might find himself suddenly wealthy. The idea that a person could consider himself middle class or lower one day and wealthy the next is a recipe for financial disaster. It’s easy to look at athletes because their trials and tribulations are often front page news. Michael Vick had some problems with the law, but now he’s dealing with financial fall-out. He has declared bankruptcy, and for the first time, the public is getting to see the choices he made with his money.
Vick listened to the wrong people and was perhaps a little gullible and trusting. His seemingly unlimited income gave him the opportunity to spend with zeal. He paid $223,000 a year for dubious financial advice, $78,000 a year for allowances for his family members, and an extra sum of $209,000 for his mother. His obligations included various house payments for his family in addition to the allowances, salaries for his entourage, $10,000 per month on jewelry for a period of 20 months, payments for his own houses (four), boats (five), cars (eight), and horses (unknown).
And then he wasted his money on failed business ventures for which his friends and advisers convinced him to part with more of his money, like a rental car franchise, janitorial operations, a restaurant, and of course the issue that eventually landed him in jail, the dog fighting ring.
The result of all his money missteps was bankruptcy, with a variety of companies staking claim to his future earnings. At least in Vick’s case, he is getting a second chance. With his new contract, and with a new approach to managing his money, he should be able to meet all his financial obligations.
The thought of having a sudden influx of cash, particularly if it puts you in a significantly different financial situation that those who are closest to you, is frightening. Suddenly, friends and strangers might approach you with investment ideas or pleas for help. Many suddenly wealthy individuals are grateful for their situation and want to help others, but responding to these requests can be a quick road to losing everything.
Ron Lieber, columnist for the New York Times, offers a three-pronged approach for people, not just professional athletes, whose financial situation changes significantly, quickly: slow, small, and scrutiny.
Slow
Don’t make decisions right away, and keep the money invested safely in cash or bonds from the outset. Don’t give in to the immediate pressure you may receive from friends, family, and strangers looking for investment capital or financial help, even though you may strongly desire to help those closest to you. Decisions made quickly could end up hurting your financial security later, so slow down your approach and resist the temptation to immediately go after investments that promise to pay off handsomely. It’s true that the wealthier you are, the more access you have to potentially lucrative, but complicated, investments, but keeping money invested safely for a while helps you wait until you can make more rational decisions.
Small
The good-hearted among us will want to use newly-acquired wealth, particularly if there is more money available that any one family could use in a lifetime, to make grand gestures with large amounts of money, making the world a better place. The adviser quoted in Lieber’s article points out that many athletes invest in a city only to find out they would be traded to another city the next year. Keeping gestures small would make more sense.
Additionally, if we’ve seen anything from celebrities in Hollywood, there’s often a temptation to use wealth to buy a massive house. Many people, even the wealthy, aren’t prepared for the expenses involved with maintaining a house, particularly if that house is large. There’s always a chance that it proves to be a good investment, if another celebrity makes the risky decision to buy the mansion at a higher price down the road, but there are never any guarantees. In the case of athletes, many become wealthy at a very young age — and they may have never even lived on their own before. The article suggests buying a small home to start, perhaps even a condo.
Scrutiny
Shady advisers appear out of the woodwork when there’s money to be made. The article says it’s a good idea to have an adviser, but be very selective. I’ve written a series about selecting and working with financial planners, and weather you’re suddenly wealthy or looking to build wealth over time, the same concepts apply. The most important factor is finding a fee-only financial planner to serve as a fiduciary, which means they are bound to advise in your best interests only. Even this doesn’t prevent an adviser from taking advantage of a client, though.
I would also argue that a good, solid education about basic money management can go a long way in reducing the need for outside “expert” opinions about how to hold or invest your money.
An athlete signing a professional contract, a lucky individual who wins the lottery, or an entrepreneur selling his company to Apple all might have to deal with a sudden influx of wealth. Keep cool and don’t make any sudden moves. Wait before offering any financial help or investment capital to friends, family, and advisers. From a practical point of view, these are likely to be good priorities:
ESPN, New York Times
But celebrities — the top echelon of movie stars and athletes — are in their own class. 
The sum Lindsay owes is small compared to the problems other celebrities have had with the IRS.
