Advice Millennial Startup Millionaires Need to Hear
When Snapchat recently when public, a number of its employees—many of whom are Millennials—became millionaires overnight.
Chantel Bonneau, a wealth management advisor at Northwestern Mutual based in California, works with a number of Millennials who became overnight millionaires because their companies went public or were bought out.
“For every Snapchat you hear about,” she said, “there are lots of other companies you may not know about where the same thing is happening—and 25-year-olds are suddenly coming into a significant amount of money.”
Getting a huge windfall at such a young age comes with challenges. Bonneau has seen Millennials take advantage of the opportunity to set themselves up for future financial success. But she has also seen a number of people make financial choices that they later regretted. She believes it’s important for people in such a situation to have a plan ready for the money.
1. Admit that you’re a rookie in the big leagues. According to Bonneau, Millennials who come into money overnight are often at a disadvantage. “They might not have built a good financial planning foundation,” she said. “For most people, building wealth is a linear process. As they make more money, their skills on how to manage it improve; or they bring on advisors. But that’s not the case for most of these workers.”
Many haven’t spent time thinking seriously about their financial goals and priorities, so their choices after getting the windfall are often based on whims or instincts rather than solid plans.
2. Understand your options. Bonneau suggests you first seek help from your company to understand the details of your situation once a buyout or a public offering is announced.
“You need to know the timeline of when you’ll have access to that money,” she said. “You need to know the tax ramifications because sometimes your company will take the taxes out for you (and sometimes companies don’t). It’s important to understand whether you’ll have to wait to sell your shares, as that adds uncertainty about how much your shares will be worth.”
Once you know that, you can start thinking through what you might want to do with the money. That includes considering short- and long-term financial goals and figuring out what your priorities are. For example, you might decide that you want to put money aside for your retirement before you buy a home. Professionals can help you prioritize what to do first if you’re not sure.
3. Focus on the future. You are coming into a lot of money, and you should celebrate. Bonneau says it’s okay to blow through some of it now. But she recommends doing so as part of a plan that also sets you up for more financial success in the future.
“You should be putting money aside for short-, mid- and long-term goals and not be solely focused on today,” she said. “When you are young and you make the maximum contribution toward tax-deferred accounts, for example, that money adds up because it grows in a compound fashion.”
But instead of seeing people maximizing their investment options, she sees many of these workers making financial missteps. “I often see people buying a house that is too expensive because they have the down payment and money in the bank,” she said, “but they can’t actually afford the mortgage and costs out of their regular salary.”
She recommends maxing out retirement accounts and paying off debt first, and then working with a financial planner to determine your other financial goals and whether they’re feasible.
Plan So You Won’t Have Regrets
“It’s important that you have a financial advisor and a good accountant,” Bonneau said. “They can help you figure out your options for what to do with the money and the tax consequences involved. A financial advisor will also help you think through things like what you want in life, what your financial goals and objectives are and what your risk tolerance is before the windfall happens.”
Bonneau has met a number of Millennials who feel they’ve misspent a big portion of their windfalls. “They feel like they don’t have enough to show for such a great financial opportunity,” she said. “Some people, especially if this is the first company they’ve worked for, believe that these windfalls happen all the time. But they realize later that this was likely a once-in-a-lifetime opportunity, and they didn’t properly take advantage of it.”
That’s why it’s so important to make the right choices before you get the money. “In contrast, Millennials who plan well for how to handle their money feel like they are ahead of the curve financially,” she said. “They are really proud of their accomplishments, and they’re grateful that they used this opportunity to change their lives.”