A long-time GRS reader named Andy dropped me a line the other day to point out an article on the Forbes website. Forbes interviewed billionaire Mark Cuban (best known as the owner of the Dallas Mavericks pro basketball team) about his secrets to building and keeping a fortune.
Andy particularly liked Cuban’s answer to the penultimate question, which is about what to do with a windfall. (Or, I suppose, what to do with a bunch of money you just have sitting around in the bank.)
You have $100,000 — where do you put it?
Then I try to create as much transactional value as possible from that cash. I look at my annual budgets for everything and anything, and I look to see where I can save the most money on those items. Saving 30% to 50% buying in bulk — replenishable items from toothpaste to soup, or whatever I use a lot of — is the best guaranteed return on investment you can get anywhere. Then whatever I have left I keep in the bank and let it earn nothing. Why? Because then its available for when I get a good opportunity.
Every five years or so there is a bubble bursting or amazing deals available because of a change in the economy. Anyone who just kept their cash in the bank rather than in stocks over the past five to 10 years could be buying the home of their dreams for half price in most of the country. They earned good money in half the past 10 years on the cash, and even though they aren’t making much now, they have the transactional value available to them. Plus they have cash to invest if the market craters and, most importantly, they sleep great at night. Cash is king — and works far better than Ambien when you want a good night’s sleep every night.
Cuban’s advice for handling a windfall is just as applicable to allocating your regular income. As he says, your priorities should be to:
- Get out of debt.
- Build a budget that works for you and your situation.
- Save your money — as much as possible.
- Invest wisely.
Cuban’s advice reminds me of that from his fellow billionaire, Warren Buffett. Buffett famously lives a (relatively) frugal life, and encourages average folks to pursue frugality and sensible investing, too. In many ways, he’s like “the billionaire next door.” Cuban’s financial philosophy is similar to Buffett’s. Coincidence? Or maybe there’s something we average folks can learn from billionaires like them.
[Forbes: Ten questions for Mark Cuban]