Managing a Financial Windfall

I have often wondered what I would do if a generous billionaire, a Bill Gates or Warren Buffett, gave me $500,000. Or maybe $1,000,000? While I am sure I would not have known what to do with it 12 or 13 years ago, I absolutely know what I would do with the money today. Being financially literate is not something that comes with a financial windfall. It is something that should be attained while you are working toward achieving financial freedom; and it is knowledge that will serve you well should you be lucky enough to stumble into a financial windfall. That thought leads me to lottery winners.

I remember hearing various stories of his tribulations over the years; and I recently read a “where are they now” story of Jack Whittaker, winner of the $314 million Powerball inFinancial Windfall 2002. At the time, it was the largest lottery jackpot in history. Within six years of winning the lottery, Mr. Whittaker had been robbed multiple times, lost a granddaughter to drugs, lost a daughter to drugs, been sued, been arrested for a DUI, and his wife had filed for divorce. His story would seem to validate that money itself does not guarantee happiness or endow common sense.

Perhaps not surprisingly, Mr. Whittaker is not alone. The National Endowment for Financial Education, a Denver-based non-profit, estimates that about 70% of those incurring a financial windfall lose the money within a few years.

Before I became financially literate, I would have done what most people would probably do with a financial windfall: buy a new luxury car – or two, buy a new house, buy new cars for siblings, buy a house for my parents, quit my job, and on and on. Now? While I would certainly consider some of those things at some point, I would not do anything initially. That is right. I would not do anything with the money for at least six months – one year.

After all, my wife and I live comfortably, my parents live comfortably, and there would be absolutely no reason to act hastily. I would not quit my job. While I do not know the exact windfall that would prompt me to quit my job immediately, it would have to be significantly more than $500,000 and probably more than $2,000,000. During that six month – one year period I would conduct a thorough review of my portfolio and carefully assess how to incorporate the new money into my retirement plans.

And you, SavvyReader? What would you do if Mr. Buffett gifted you $1,000,000 or you won a $5,000,000 lottery?

Would you immediately buy cars and houses for yourself and family members? Would you buy a few small things but wait for some period of time before making any major purchases? Would you not make any purchases for a designated period of time? Would you engage the services of a financial planner?

Looking forward to getting feedback from SavvyReaders.

Blogger-in-Chief here at RetirementSavvy and author of Sin City Greed, Cream City Hustle and RENDEZVOUS WITH RETIREMENT: A Guide to Getting Fiscally Fit.

14 Comments

  1. A Google+ reader notes…

    “I have to agree with you James Molet – I wouldn’t do anything either for awhile.”
    

  2. If someone gave me $2 million I’d probably just want 5.

  3. If it’s less than 500.000, I will probably keep a third for myself (to invest in dividend stocks) and pay my parents mortgage.
    Above it, I would split it equally between all my family but don’t give them anything directly. Their share could be used to payback their mortgage if they have one. All the rest would be invested in some rental properties to provide a stream of income.

    • Sounds like you have a thoughtful plan, JP. Too many people don’t and end up squandering the windfall. I don’t believe there is necessarily a right or wrong answer. The key is that there has to be consideration given to how the windfall can complement your existing plan. Of course, that is assuming there is a plan. If not, it would definitely behoove the recipient of a windfall to slow down, formulate a plan, and not make any rash decisions. Thanks for stopping by and joining the conversation.

  4. This is definitely something that goes through most peoples minds; how they would spend the windfall.
    Money can cloud judgement fast, so
    a) I’d not touch the money for at least 6 months to a year. I mean, I’ve survived all along without it, whats another six months?
    b) In that time I believe I would gain clarity on what exactly to do with the money.
    c) Top on that list would be clearing as many outstanding debts for my family members and I, a huge chunk would also go to investments to ensure it lasts us longer
    d) I’d give part of it too

    • Sounds like a reasonable approach to me. I believe clearing debt and helping family members would top the list for most people. Thanks for adding to the discussion, Simon.

  5. It is absolutely imperative that people “get smart with regards to understanding money even before they have a lot of it”. Lottery winners become bankrupt within years of their winning because they lack money management skills. They treat their winnings as infinite because they don’t truly understand what money is, how it works, it’s real purpose or how quickly it can vanish.

  6. Wow! Wouldn’t that be nice! I would definitely pay off all of my bills, I think everyone should do that regardless, my opinion. I would buy my mom a house and give her some spending money as she is in her golden years and has never really known anything other than living paycheck to paycheck. Finally, I may slip in a really nice and well deserved vacation for me and my husband. The rest would be put towards retirement. That being said, I may retire a little earlier than expected, but I definitely would still work for a few years.

    • Taking care of family would definitely be at the top of my list. At the end of the day, that is who we are and what we have. Not leaving the work force right away would definitely be a savvy move. Thanks for the great comments, Karen.

  7. This is something I’ve given thought to. I agree that in order for me to quit my job the financial windfall would have to be greater than 2 million.

    While I wouldn’t wait for an extended period before I made plans with the money, I would consult a financial advisor/planner. Like Taz I would build a modest home, payoff all of my debt. I love cars, my only extravagance would be a high end automobile, not luxury. I would need only one vehicle and would drive it until the wheels fall off. The next part would be to take care of debt for immediate family and as James wrote establish a Trust for kids, nieces and nephew. I would be mindful of giving cash gifts, I believe this contributed to the problems that plagued the lottery winner above. If someone can’t manage their $35k annual salary how can you expect them to manage a cash gift of twenty times that. I’m sure Jack Whittaker has learned that the acquisition of wealth is only a change, not an end of problems.

    • I like the idea of waiting as I have found that even when I have made good immediate decisions, I often would tweak those if given more time and more information. Hindsight and time always reveals ways in which something could have been done better. If there were immediate serious needs (e.g. family medical emergency, etc.) I would take care of them quickly. However, I believe I would find some value in taking a deep breath and giving decisions some time. You are absolutely correct with regards to understanding how to manage money. That is where financial literacy comes in. I always suggest that people get smart with regards to understanding money even before they have a lot of it. One of the things I plan to do with regards to leaving money to young family members – and I plan to have lots of money available for inheritances – is to dictate that recipients must have reached a certain age (40 or so?) and attained some type of personal finance education/training before they receive the money. I believe you have a 50/50 chance of creating more problems by leaving money to people that have no understanding of personal finance concepts and managing it.

    • Brian Tramuel: Really great comments. Not many people have the courage to drive their car “till the wheels fall off” but that mentality is what helps create & sustain millionaire status.

  8. This is something my wife and I have discussed over the last few years. If we were given 2 million dollars we’d pay off our car (a paid off loan helps our credit score), possibly buy an electric car and pay off both credit cards, if they had a balance.

    We would then buy or build our modest dream home so we’d never have to worry about a mortgage. We’d also put aside a large chunk for our children’s education. And of course we’d invest in stocks or a local organic farm along with planting our organic garden on a few acres behind our home. The rest would go into savings accounts at credit unions near where we live.

    • Nice. You have definitely given it some thought. I believe I am largely set with regards to cars and a home and our debt is largely under control. I believe there are two things I would make priorities, which I would plan carefully during my self-imposed six month – one year timeout: the retirement portfolio and establishing some type of trust to benefit future generations of my family. Of course significant factors with regards to a windfall are how much money we are talking about and the state of a portfolio at the time the windfall is received. Receiving a windfall of $500,000 at a time when a portfolio is ~ $5,000 would be nice. Receiving a windfall of $500,000 at a time when a portfolio is ~ $500,000 probably means you can retire a few years earlier, pay off all debt, and lend some assistance to family members…really nice. Receiving a windfall of $2,500,000 five years from now after that $500,000 portfolio has grown to ~ $900,000 is really, really nice and something else entirely.

      I’m hoping Mr. Buffett reads this blog post and gives me the opportunity to see how I would handle a significant financial windfall. 🙂

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