A while back I wrote How Not To Handle a Windfall where talked about a family who had gotten $10 million after taxes twelve years ago and who are now borderline broke. They spent millions on real estate and toys. I counted it up and they had spent over $7 million. There are numerous stories of people who come into large wealth and then end up broke. Whether its a lottery winner, a professional athlete or a rock star the phenomenon is fairly common.
Of course most of us would love the opportunity to manage millions of dollars. But doing so may be harder than you realize. Its easy to spend money. But making sure that millions will last a long time is not simple at all. I thought it would be fun to talk about what I would do if I had millions of dollars in order to ensure that my wealth wasn't squandered and that it would last my lifetime.
Ensure future income
One of the major problems with instant wealth is that people get the feeling that this large amount of money will last them forever. But it won't last if you keep spending money and quit your job. You have to make sure that you have income in the future. Theres two key ways to ensure you have enough money to support yourself in the future. 1) keep your money and spend it very slowly or 2) invest the money so it makes you an income.
If you have a large pile of cash you can't simply live off that money forever unless you spend it very slowly. For example if I have $1,000,000 and I spend $20,000 a year then I'm sure that it will last me 50 years. There is also the 4% rule that people commonly cite. This is the idea that if you spend 4% of your money every year then it should last you your life. However this rule is based on probability and assumes your money is invested in a way that it gets some return. There is no guarantee that a 4% rate will last forever. To be more conservative you might chose a slower 2-3% spend rate.
Investing your money so it makes you money is a good idea. If you buy dividend paying stocks, bonds or simply make interest in a savings account your money is making money for you. But you have to be careful with it so you don't lose it.
Keep Your Money Safe
A lot of people who end up blowing their fortune have lost their money because they invested it unwisely. Its not hard to lose a lot of money: buy Enron ten years ago or make leveraged purchases of large residential real estate developments in Las Vegas 4 years ago. If you have millions you really have no reason to take unnecessary risks with the money in the name of making piles more money. Play it safe with your investments and don't take risks that could lose your fortune.
Don't over spend
If you had a large windfall then you might be tempted to go buy all the fabulous things you could ever want. I think this is what happened to the Martin family. They simply spent too much. Of course you'll want to spend some of your new pile of money. The key here is to make sure you put away enough money to ensure your future first.
Expect New Costs
If I win the lottery I'm going to go buy a new house. I don't need anything super fancy. It will be bigger and nicer and will have a little land. Buying this house will come with a lot of new and bigger bills. My property taxes will be much bigger and all our utilities will be bigger. If you win the lotto jackpot and end with $10 million you might reasonably go buy a nice $1 million home. But that new $1m home may very well have a $10,000 to $20,000 property tax bill. You might go buy new cars for yourself and your wife. Those cars may cost a lot more to insure and maintain. If someone handed me $10M tomorrow I would quit my job so fast the chair in my office would spin around after I leave my office and the burst of air stirred up by my rushing out the door would cause papers to be caught up in the back draft just like in a cartoon. (I think about that image entirely too much). Anyway after I quit my job it would not take long at all for me to realize that I'm now responsible for paying for my own health insurance, dental care, getting independent life insurance and disability insurance. Its important to account for these costs before they happen. Don't run out and buy a $2.5M house and then figure out after the fact that you never accounted for the $50,000 property tax bill. Make sure you can afford that tax bill, the increased utility costs, extra maintenance costs, etc BEFORE you make a purchase.
If I Had a $10M Windfall
Off the top of my head this is how I might budget a $10 million windfall:
$1m set aside for "hobby" spending$1m for a nice house
$1m set aside for charity$1m for family and friends
$5m in safe investments, primarily high rated bonds
$1m in a trust to ensure future income no matter what
I would then count on the $5m in investments to generate a reliable $150k annual income. The $1m in the trust would also give another $30,000 of income. Hobby spending would be set aside to fund our spending on our more frivolous interests.
What would you do with $10 million?