Soaring assets and stocks in the past year have in some cases handed midlevel workers huge windfalls.
Those who have benefited from the market surge typically fall into one of three categories, said Sahil Vakil, founder of personal-finance tech company MYRA: They were given company shares as compensation and those same shares recently boomed; they caught last year’s retail investing frenzy and rode the market to new highs; or they invested early on in cryptocurrency, to great success.
The Nasdaq Composite rose nearly 47% over the past 12 months, and even after a recent pullback, a crypto investor who put $10,000 in
at the end of 2019 could have netted more than $50,000 in gains after bitcoin’s 2020-21 surge.
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In the past year, more than half of Mr. Vakil’s clients have experienced a market windfall. On the East Coast, Mr. Vakil says his clients typically work in the finance and consulting sectors; on the West Coast, most are working in the tech industry. The average household he works with holds $250,000 in assets and falls between the ages of 25 and 45.
Many of these workers may have struggled with stagnating wages and huge student loan debts earlier in their careers. Some worry they’ll mismanage this boon and forever ruin their chance at financial stability.
“These individuals completely feel and understand and recognize the pain of the last year, but now they’re being given an opportunity to come out of that,” Mr. Vakil said. “They’re saying, ‘This is my one chance.’ They’re taking it with both hands. They don’t want to mess it up.”
Here are some tips to manage a sudden windfall.
First, put long-term goals in focus
a 36-year-old tech executive based in New York City, began investing in cryptocurrency, mostly bitcoin and recently ethereum, in late 2019. By the end of 2020, that original investment more than quintupled.
”I want to have enough money where if my family wants to splurge on a vacation, there isn’t anything holding us back,” he said. “I don’t want [student debt] to be an issue for my kids or for anyone in my family.”
He chats about his crypto investments in a group message with other friends interested in bitcoin. To shore up his funds for those future goals, Mr. Gupta is planning to hold on to his bitcoin investments in hope they continue to grow.
”I just know having money sitting in a bank account—that’s not my nature,” he said. “I like to take risks with my money.”
Deal with the feelings
A sudden market windfall in these times can lead to decision paralysis, said
certified financial planner and founder of Flow Financial Planning. She has seen clients wrestle with feelings of elation, fear, guilt and stress.
“From a mathematical perspective, they can now easily buy a home for $2 million, but psychologically, that’s unsettling,” she said. “They can’t wrap their heads around it.”
Ms. Bartelt’s first plan of action: Don’t buy the new vacation home or launch the new business, yet.
“Good financial decisions are rarely made in the middle of an emotional maelstrom,” she said.
“The piece of advice I find myself giving over and over again is actually a best practice in the world of what’s called ‘sudden money’: Don’t do anything that’s not necessary. I think it’s very worthwhile to not do anything big or irrevocable until your emotions have settled down around this huge wealth event.”
Set aside money for taxes immediately
Mr. Vakil said all his clients bring one big question: Will I be in trouble come tax time?
“The first concern all these people have, unanimously, is not ‘What do I do with this money?’” he said. “It’s ‘What do I do with my taxes?’”
For clients who have only recently begun trading, he said, coping with capital-gains taxes may be a new and confusing experience. For example, the profits on assets held a year or less are taxed at much higher rates than the profits on assets held longer than a year.
Those trading cryptocurrency must keep in mind that a sale or exchange from one cryptocurrency to another will count as a taxable event (this can also include events known as forks and airdrops in the crypto world). Keeping careful records of all transactions can help at tax time, as current law doesn’t yet mandate brokers to report crypto sales.
To help clients minimize their coming tax bills, Mr. Vakil often recommends tax-loss harvesting, which means selling losers strategically to reap losses that can offset the taxable profits from winners. For crypto investors, this may be difficult to untangle if they haven’t kept records on their own.
While brokerage firms must keep records about stock trades and send the information to the Internal Revenue Service, crypto exchanges don’t have to do this under current law.
Mr. Vakil also advises his clients who trade frequently that they may need to pay estimated taxes quarterly to Uncle Sam to avoid penalties at tax-filing time.
a financial planner and founder of Simplify Financial in San Francisco, often recommends moving money for taxes at the time of a sale into a separate account so it isn’t in danger of being spent or mismanaged. Large taxable gains are also an opportunity for investors who are charitably minded, says Ms. Behr.
Under current law, donors who make gifts of appreciated assets to charities often don’t owe capital-gains tax on the appreciation. Instead, they get a charitable deduction for the asset’s full market value.
“That allows you to get some of this stock off your plate that maybe allows you to have high gains,” said Ms. Behr. “And then you’re rewarding that charity with a larger gift than you would if you just gave cash.”
Next, plan for your immediate needs
For those unsure about what step to take next, Mr. Vakil recommends handling immediate concerns to buy yourself some more time.
That could be paying off your mortgage or car, or wiping out any other debts. With these monthly bills out of the way, the client has more brain space to consider what they want to do with this new, slightly smaller, pile of money.
One of the other initial steps on Ms. Behr’s list for clients: diversify their portfolios. Because many of these clients will have benefited from a company liquidity event, their portfolios may be heavily weighted toward one stock, which can be risky.
”Every time someone has a windfall, there should be a plan,” she said. “I’m trying to move them to action.”
Now vs. later
Mr. Vakil and Ms. Behr say most of their clients don’t kick up their heels and sail off on a yacht.
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”I don’t have clients who are like ‘I’m going to go off and buy a Lamborghini’ or ‘I’m going to Tahiti,’ although I’m sure those people are out there,” Ms. Behr said. “I get people asking ‘’How do I live now? Do I just live off my salary like I was before?’ And I say, ‘Look, the sky’s the limit.”
Planning how your sudden windfall could open a new chapter may feel intimidating to some, but to others, it is exciting.
a 37-year-old trader now based in Mumbai, India, hasn’t made a million yet, but he says he’s closing in. He hopes the money he has made could become seed money for a new business or fund an early retirement.
“There were times last year I thought, ‘Why am I working? I should just be trading,’” Mr. Kalani said. “I have a runway now.”
Seek advice in the right places
Seeking advice from family or friends on what to do immediately can also lead to complicated feelings of competition and decision fatigue, said Ms. Behr.
“A lot of them get overwhelmed,” she said. “Every one of these companies going public has some Slack channel talking personal finance, and it can get heated.”
Ms. Behr’s clients say the most common concerns in these Slack groups are tax-related (“Will I need to completely overhaul how I file?”) and future-obsessed (“Where should I put this money until I determine how I’ll manage it going forward?”).
Going from “I don’t feel financially stable” to “I finally have options” can feel shocking or even intimidating, Ms. Behr said. Rather than relying on virtual water-cooler tips, she urges making a realistic financial plan and seeking the help of advisers they feel will understand their values.
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