The dangers of making a fortune at a tender age

We all dream of winning the lottery or inheriting a life changing amount of money. But unless sudden wealth is carefully managed, it can quickly disappear, wasted on bad investment decisions or impulsive spending.

Emma Raducanu, the British tennis star who won $ 2.5 million at the age of 18 for winning the US Open last month, is set to earn millions more in promotional offers. She had joked that her first goal at the tournament had been to earn enough to buy a new pair of Apple AirPods for £ 159.

Now she joins a long list of young people who have made a lot of money very quickly in recent years. Footballers, such as Raheem Sterling, are a prime example; he is 26 years old and worth around £ 38million. Pop star and Brit Award winner Harry Styles, still just 27, has an estimated net worth of £ 75million. Tom Holland, best known for playing Spider-Man in the Marvel movies, is 25 years old and has an estimated fortune of £ 6.4million.

It’s not just sports stars, actors and musicians. Kids who make money as influencers, such as American YouTube stars Ryan Kaji, nine, and Evan Moana, 15, have made millions of dollars from videos such as toy unboxes . Young entrepreneur Mikaila Ulmer, 17, became a millionaire from sales of her Me & The Bees lemonade, while Alina Morse, 16, made millions on sugar-free lollipops.

Teenage lemonade millionaire Mikaila Ulmer © Mike Windle / Getty Images

But, for some young people, a windfall can be an emotional and financial disaster. The term “sudden wealth syndrome” was coined in the 1990s during the dot-com bubble, when investors poured speculative money into online start-ups. The term describes the overwhelming pressures of an unexpected fortune. “Just because someone has been successful in track and field or in a business doesn’t mean they now know what to do with a large sum of money,” says Chris Page, Certified Financial Planner and Director of Lewis Brownlee Financial Services in the south of England. . “The larger the amount of money. . . and the younger the person can combine to make it very difficult to manage.

This can be a particular problem for young people from modest backgrounds. Wealth managers say clients often struggle with feelings of elation, fear, guilt and stress after the initial rush has passed. Kevin Swanson, chief executive of California-based wealth manager Potentia, says many are unprepared. “A lot of times people got into sports or social media because they were following their passion, but money can cloud our decisions and create emotional chaos.”

Footballer Raheem Sterling, 26, estimated to be worth £ 38million

Footballer Raheem Sterling, 26, worth an estimated £ 38million © Laurence Griffiths / Getty Images

A large number of young people who make money quickly end up losing everything. Argentine footballer Diego Maradona made millions of dollars in his heyday in the 1980s when he was in his twenties, but, in 2009, filed for bankruptcy. He died last year at the age of 60. In 1990, boxer Evander Holyfield became world heavyweight champion at age 28, but lost much of his fortune, in part due to poor investment decisions. “Current incomes can be high and increase, but the future incomes of athletes and artists are inherently uncertain – they must hope for the best but plan for the worst,” said Peter Daniel, head of private wealth management at the firm of lawyers Collyer Bristow in London. “You’re never just an injury or a drop in popularity away from a significant drop in your income. The principle should be to make hay while the sun is shining. Set aside as much money as possible for rainy days when income is high. “

Financial experts recommend dealing with immediate problems. It could be paying off a mortgage or car loan, paying off other debts, and most importantly paying taxes. “You can suddenly go from no tax at all to the highest tax rate,” Daniel explains. “It would be wise to look at options to mitigate income tax, for example through pension contributions or charitable donations.”

Anyone attending or performing around the world should keep in mind that they may have tax obligations in different jurisdictions, in which case an accountant with international expertise is essential. There may also be unusual details to consider, such as how to structure image rights.

Young people often want to express their gratitude to their parents with gifts. “It is not uncommon to hear that young people who find themselves in a financially fortunate situation will offer their supporting parents a house, a car or large sums of money,” said Lilly Whale, private lawyer. at Goodman Derrick in London. She gives the example of YouTuber Adam B who, at 20, surprised his parents by buying them a family home in Northern Ireland. At any age, however, the rules about giving should be considered, depending on the jurisdiction in which you live.

Then there are considerations of the financial wisdom of those who gain great wealth in their younger years. “Sadly, it’s pretty common to hear about celebrities suffering,” says Whale, pointing to American pop star Britney Spears, who struggled with mental health issues in her twenties after reaching fame and wealth. In 2008, she was placed under trusteeship, with her financial and personal affairs being managed by other people. In September, a judge suspended his father as a curator but left in place separate guardianship with an accountant chosen by his legal team. If Spears had planned ahead, she could have chosen who she wanted to run her affairs in case she was deemed unfit to do it on her own. A similar system exists in the UK: people can set up a ‘durable power of attorney’ by deciding in advance who will take charge of their affairs. Those who do not may have someone imposed on them by a court order.

Pop star Britney Spears, pictured at 37 in 2019

Pop star Britney Spears, pictured at 37 in 2019 © Valerie Macon / AFP via Getty Images

There are practical reasons why celebrities and athletes ask others to manage their interests – through, for example, an enduring power of attorney over property and financial affairs. Raducanu, for example, is likely to travel abroad. If she is building large assets, she may need trusted people to make decisions on her behalf when she is overseas or less available to manage her portfolio.

“Rather than being relevant only when you become unable to run your own affairs, it can be helpful to have someone you trust with the authority to make decisions and sign documents on your behalf, especially if you do. around the world, ”explains Daniel.

The investment plans will differ depending on whether someone enters the money at, say, the age of 25 versus 65. “We recommend dividing those [financial] areas into four compartments: one for life events, an emergency fund, working capital and retirement, ”says Swanson. “Each of these compartments feeds the biggest financial goal, whatever it is, in a strategic way. Goals may include buying a home, investing in personal life experiences, or purchasing assets such as art, technology, and property. Other, perhaps more mundane financial areas also need to be addressed, says Natasha Oakshett, London-based private and tax client service partner at the law firm Withers. “Having mechanisms that effectively divert funds to things like pensions, insurance policies, and certain tax-advantaged savings products as regular automatic expenses that you don’t actually have access to, takes those funds out of the way. table and is the easiest way to protect them, ”she said.

Financial advisers in every country have products and structures that save tax. But Oakshett advises caution. “If you don’t understand what the product does and how it does it, but the result sounds too good to be true, you probably do,” she warns. “If you find yourself in an arrangement that is challenged by the tax authorities, not only can it be costly and time consuming to defend, but the damage it can cause to your reputation or brand can be proportionately much greater. “

Mistakes are easier to make when someone is newly wealthy. “Money slips through their fingers in two or three years because they’re not prepared to be good stewards,” says Swanson, who says he often sees young people with a long list of things to spend on. money that rarely includes retirement savings or an emergency fund. Fast cars, boats, planes and even islands are popular, especially with professional footballers.

Perhaps the most disturbing thing about sudden wealth is that the recipient becomes a target for others looking to profit from it. Many celebrities have lost huge sums of money that they gave to people or investment programs they believed to be legitimate. Most infamous was Bernard Madoff’s Ponzi scheme, which victimized prominent businessmen, sports stars and celebrities.

“Even friends and family, wonderful as they are, often feel entitled to have a share of the sudden wealth,” says Swanson. “That doesn’t mean you shouldn’t help people, but set aside a fund to help. “

This article is part of FT Wealth, a section offering in-depth coverage of philanthropy, entrepreneurs, family offices, as well as alternative and impact investing

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