Ask the Readers: I’m Not Good With Money — How Should I Handle a Windfall?
Published on - February 1st, 2008 (by J.D. Roth) Mitch recently wrote to me with one of the toughest reader questions I’ve seen yet. He lives a paycheck-to-paycheck existence, but will soon be coming into a lot of money. He wants to know what he should do:
It is now 11:45pm on 14 January 2008, the day before payday! It’s also about three days before being broke. With no savings and poor credit, I’m living paycheck-to-paycheck. For now, I bring home about $400 a week. I have lived like this for about 15 years, and it is not a good way to live.
Here is my question: In July I will be getting $125,000. What do you think is the best way to make this money last?
I’m really ready to stop living like this, and think that I have a second chance to change things. About seven years ago I received $50,000 and have nothing to show for it today but a few good stories. Thanks for any help.
Wow. There’s so much to respond to here. I’ve been where Mitch is — living paycheck-to-paycheck — but I’ve never experienced a windfall, let alone two of them. I think Mitch is in a unique position, having burned through one windfall before. I admire his desire to escape his current situation, to make the new windfall last.
The Bogleheads’ Guide to Investing has a great chapter on how to manage a windfall successfully. I’ve shared this advice before, but it’s worth repeating. The authors say that if you come into sudden money — through inheritance, the lottery, or any other means — you ought to follow the following steps:
- Pay any taxes due.
- Take one or two percent to treat yourself and your family. If you receive a windfall, by all means do something special. But do it modestly. How much is 1-2%? It’s $10-$20 on a $1,000 windfall. It’s $100-$200 on a $10,000 windfall. It’s $1000-$2000 on a $100,000 windfall.
- Use some or all of the money to pay off debt. As unglamorous as this sounds, it’s the best course of action. If you have existing debt, use your windfall to get rid of it. This will free up cash flow, and you’ll essentially be able to enjoy a prolonged time-release windfall.
- Deposit the rest of the money in a safe account. Put it someplace that will earn you interest while you decide what to do with it.
- Do not touch the money for several months. Allow the initial emotion to pass. Get over the initial urge to spend the money on a big house or a fancy car. Live your life as you had before.
- Make a wish list. Spend time learning how much the windfall can buy. Most people have unrealistic expectations about how much $10,000 or $100,000 or $1,000,000 can buy. Resist all temptations to use the money now, but run the numbers to see what it could buy.
- Get professional help. Do not obtain advice from somebody who might profit from your money, such as a commissioned broker. Find a good CPA who does not sell investment products.
This is good advice, but it’s very much “by the book”. Coping with a windfall, as with most financial decisions, is more about mind than it is about math. There are powerful emotional and psychological factors to be considered. Mitch is living a paycheck-to-paycheck existence and isn’t happy about it. That’s an important consideration here.
What advice do you have for Mitch? Have you ever experienced a large windfall? How did you handle it? What would you do differently? What can he do to preserve his capital while also improving his current quality of life? How can he balance short- and long-term happiness?
This article is about Ask the Readers, Choices, Psychology, Real-Life
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Please consult with a fee-only financial advisor, not a CPA. Check the NAPFA website for one near you. Most offer reasonable hourly rates and can help you put the windfall to maximum long term effect. In my office, we routinely handle clients who only need an hour or two of our time to be nudged in the right direction.
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If you have trouble with temptation and anticipate trouble paying monthly bills, maybe you should buy a treasury note. These pay interest every 6 months which would prevent you from getting your hands on big sums of money all at once.
Here is what I would advise:
-When you get the windfall, spend $1000 on whatever you want.
-Put $3000-4000 toward debt or an emergency fund.
-In the first month, buy a $20,000 treasury note and put the rest of the money someplace where you know you won’t touch it.
-Buy another $20,000 treasury note in the 2nd, 3rd, 4th, 5th, and 6th months.
-These Tnotes should be fairly long term (5 or 10 years).
-You will be paid interest every six months, but because you staggered them, you will get a payment every month (about $425/mo at current rates)
-Now you are guaranteed that payment every month for the next 5-10 years, plus you still have the $125k at the end of that period, at which point you can use it for a large purchase or repeat the T-Note process.
These can be purchased from banks or directly from the government at www. treasurydirect.gov.
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If I were Mitch, I would not tell anyone I was getting this windfall except a spouse and older children who can handle the knowledge.
Anyone else, even well-meaning people, will do nothing but try to “help” him out of the money.
If he has already told people he’ll be getting this, then it becomes even more imperitive that he lock the money up beyond his reach for a while. Meanwhile, he should set people’s expectations that he will be using it for a goal like “plan for my children” or “go back to school” that won’t leave room for them to hound him for handouts or to “treat” himself again and again.
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I’d tell Mitch to get healthy. When you’re living paycheck to paycheck, it’s easy to let little things like doctor and dentist checkups to get pushed to the wayside. Go to the doctor and get your bloodwork done. Go to the dentist and get your teeth fixed. If you wear/need glasses, go get LASIK or a new pair. The old saying is true: If you don’t have your health, you don’t have anything.
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You know this ‘windfall’ question is very interesting because you see celebrities, artists, and athletes attempt to cope with it all the time. They know how to apply their unique skill but know very little about financial management, taxes, debt, credit, investing, etc. The first thing they find is kind of what Shelly said, you have to watch out for friends and family first, if you are surrounded by others who see money as “daily lifestyle fuel”, meant to be spent. Since the person is not expected by the public (like a celebrity) to live large, I’d hide the money in a CD for six months, and write a journal of ideas, designing a life that benefits the most from the money. I like a lot of these ideas posted. Health improvements, educational endeavors, investing, etc. I’ve actually done this exercise with a friend when I was in my 20′s (and in the military), and I was the only person he knew, that invested in mutual funds, stocks, etc.
I don’t know what happened to him once I separated from the service, but I did give him two words of advice, back then. The name of my CGM Focus Fund manager…Ken….Heebner….
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Do not spend it, invest and wait until the capital gain is so big that you can live modestly on it.
Do not spend it.
Do not spend it.
I will be a billionaire in 80 years, assuming 15% return each year. You can do better.
Think in longterm aspects, consuming now is just hedonism. Learn to love frugality and running around in rags. Then you will be a billionaire in 80 years.
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high school grad. iv been a mechanic for about 15 yrs. i have two children that i pay support on and a third that isnt mine but i am more than happy to claim
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35 yrs old, no credit cards. an x- wife, and around $15,000 debt
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[...] I’m Not Good With Money — How Should I Handle a Windfall? – I came across this blog “Get Rich Slowly” and this very interesting advice column post. Someone actually wrote in and ask how he should handle a windfall. I have heard stories of those who got a windfall and still ended up broke because they didn’t know how to handle their finances. I think this is a really, really important question to ask. Look at this to see if there’s something you can learn about handling money. [...]
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Thanks Mitch for responding.
I’d wipe out that debt first, then divide the remainder between retirement investing in a ROTH IRA and a high-yield savings account
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Pay off what you owe, start or add to a fund for your children’s education, have a little fun. Then don’t touch the rest, by the time you’re ready to retire, it will have grown quite handsomely.
You could use some of it for an education. But why do that when you could find a job somewhere that pays tuition reimbursement? I’m an RN, hospitals are a great place to start. Even if you’re not interested in nursing, most will send you to school for something. If you’re mechanically handy, start out in the maintenance department, then work toward a degree in biomedical engineering. Those are the folks who inspect and repair high tech equipment for the ICU, OR, ER, etc. Hospitals also need social workers, IT people, dietitians, bean counters. The list goes on and on. You’ll also receive benefits while you’re drawing a salary and going to school.
If it takes you 10 years to finish the degree, so what? You’re still going to be 10 years older if you don’t.
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[...] life, which any writer (especially the struggling, starving artist type) should be interested in. Ask the Readers: I’m Not Good With Money – How Should I Handle a Windfall? was an excellent article. It talks about what you should do if you suddenly receive a huge amount [...]
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My best friend and her daughter received a $116,000 inheritance each. The interesting thing is that they had to wait for one year before they got the money because it had to go through probate. Why that’s interesting is because they spent the money MENTALLY about 20 different ways during that year! Her daughter wanted to open up a candy store, among one of her ideas, and so on. So all the advice to wait, due to emtoions, is spot on. They probably wouldn’t have hardly anything to show for it had they received the money right away. In the end, after the year, I thought they both did some pretty sensible things. Her daughter is 25, married and put $50,000 in a 6 month CD, saving for the 20% down payment for a house. The rest of the money went to paying off all their credit card and student loan debt and a year old Honda Odyssey. Without those monthly payments she’s having a good portion automatically sent to savings every month & set them up on a budget to ensure that they will remain debt-free now. She also put $10,000 into a high earning savings account for emergencies, and they are contributing through their employers toward retirement. And the fun thing she did for herself was to get laser eye surgery. Her mother paid off all her debt, including her house, and put $20,000 in a high earnings savings account for emergencies & a future car fund. She too said without debt payments now, a good portion of that money is also being automatically sent to a savings account and she’s on a budget too — also wants to remain debt-free. Her mother is retired w/a pension and her fun thing was to buy herself a relatively inexpensive new wardrobe.
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My Corrections:
4. Create Emergency Fund 3-6 months income
5. Fully Fund IRA for the year
6. Fully Fund 401k for the year
7. Thinking about upcoming major purchases:
- Don’t by a new car just because you have the money. But consider saving some of the cash in a high yield CD for when you expect the end of life for your current car rolls around.
- Considering buying a house? Set aside a 20% down payment in a high yield CD.
8. Put everything else into low expense ratio index funds.
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Mitch – what do you want out of life? Figure that out, and then find a good adviser on the NAFPA website.
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[...] Ask the Readers: I’m Not Good With Money — How Should I Handle a Windfall? Get Rich Slowly addresses a question I wish I had to wrestle with more often… [...]
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Dave Ramsey had a similar question on his radio show this week-he said to work right up his baby steps. So in Mitch’s case
- Get current on all past bills
- Pay off any non-house debt
- 3-6 months of living expenses
- Do 2007 and 2008 ROTH IRA contributions
- Max out the 401k at work
- Caller had a mortgage and was able to pay off the mortgage. Mitch should do this if he has a house or consider a buying a house. However with his current salary he needs base it on his salary.
- If the windfall pays off his current mortgage, still pay the mortgage payment into an investment account.
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thank you every one. sence my question was posted i have received a raise at my job and 10 more hrs a wk. and trying to think of ways to save some of this pay increase. its pretty hard to do today but i believe i will be able to do it in the future (thanks to all the advice and ideas)and some type of school will be in my future i am looking forward to learning more about your ideas and hearing more from you. and am getting familiar with dave ramsey’s. i have post its all over the front of my computer of the ideas i like or understand and have printed out a few
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It’s hard to say a lot without knowing a ton more about his life situation. But generally, I believe that whenever you come into some money, there are three things you must do:
1) Spend some
2) Invest some
3) Give some away
You spend some because celebration is a good and healthy thing and because you don’t want to become a miser. You invest some because you know you need to provide for the future and because you don’t want to waste this opportunity. You give some away because it reminds you that you have been blessed and helps you to be contented with what you have and frankly because putting some money behind something that you really believe in can bring you great joy.
In more practical advice, I would suggest two things. First, make sure you understand and account for the tax consequences of this windfall. In other words, don’t get in trouble with the IRS.
Second, set aside some fixed amount as “fun money.” It probably shouldn’t be a huge percentage of the total – maybe $5-10K. There are only two rules for what you do with this money: you must spend it on something fun, and you must only spend it once. The rest of the money you set aside for serious and responsible purposes like emergency funds, Roth IRAs, and all that. This money, you enjoy in the short term.
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Mitch, I put together a recommended plan for you based on the information you shared. It’s posted at:
http://moneymyths.org/blog/2008/02/04/what-to-do-with-a-windfall/.
If you have more information you’d like me to look at, email me.
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First of all – congratulations on the windfall!
Second – don’t tell anyone about it except those who absolutely need to know. People will ask you for loans and you will have trouble saying no, because you will feel guilty that you received this “undeserving” windfall and they did not. If you feel you have to explain why you are saying no to a loan, tell them that, after paying off debt, you are putting the entire amount in a CD that you can’t touch for a year. Even if it’s not true, it will hopefully put an end to the discussion.
Third – You’ve received a lot of good advice about what to do with the money, so I won’t add to that. But, regardless of what you decide, the most important decision you can make is to live on less than you earn. I would bet that if you start saving just $25 a month, you will feel better about the $300 you’ve saved at the end of the year, than you do about that $125,000 windfall.
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1) Pay off any non-mortgage debt: This will free up income to extend your paycheck-to-paycheck money
2) Place $5000 in a high-interest savings account as an emergency fund. This is equivalent of an extra paycheck each month for an entire year
3) Put the remainder in a Countrywide Bank 4.90%APY 6-month CD ($10,000 minimum, not an issue here) that came online as of Feb. 5th.
4) At that point, you can reevaluate what to do. Further your career with training or education (using the money as a replacement income so you don’t have to stress over education/full-time job balance), or use the interest to supplement your income.
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One additional thought. In the present economy I think the best investment you can make is to lower energy costs, so using a windfall (and I consider a tax refund/rebate a windfall) for switching all your bulbs to CFL’s, upgrading inefficient appliances to EnergyStar, adding insulation, new windows, and/or more efficient heating system – maybe solar panels. ALl these things will pay for themselves in savings, big time, because energy costs are only going up, up, up.
Not as sexy as buying portfolio investments, but as they say, a penny saved is a penny earned.
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I am amazed at how few of you (and you too, J.D. — shame on you) mentioned giving some of this windfall to charity! I am a firm believer in sharing good fortune. My magic number would be 10% — we do this anyway, for tithing — but gee, pick any number. Just give SOMETHING to someone else besides yourself! The good byproduct: make sure it’s tax-deductible, and it will help offset that huge hit for taxes.
Having said that:
*pay the IRS bill — right away. Or put money in an account you can access when taxes come due. DO NOT TOUCH THAT MONEY FOR ANYTHING ELSE. Consider any interest earned gravy — and the start for a regular expenses savings account (like property tax – see below).
*pay off every lick of debt you’ve got — then if you think you’ll just charge up the cards again, cut them up. You probably won’t get another windfall like this again. You can’t afford to waste it, no matter what.
*pay off the house. We did this with DH’s inheritance from MIL…and this was when stock prices were skyrocketing, interest rates were low, and people told us we were better off investing in the market, instead. I can’t tell you what a relief it has been, when our income varied, not to have to worry about a house payment. Insurance and taxes are much more easily managed.
*Use some for fun. We took a Mexico trip (the best deal we could find — approx. $700 for a week, including all expenses!). We went out to eat at a nice place — and took dear friends with us, our treat. (Watching their pleasure was even better for me than the food.)
*Use some to stock up on expenses you would have to buy, anyways. Food and ‘usables’ prices are going up regularly — I’d get a year’s worth of toilet paper, your favorite canned soups, stuff like that. By the time you’re done, you probably will have earned 15-25% on those investments. (and if times get hard, you’ve got some backup, too.)
*Set aside some for an emergency fund. (I’d do 3 months expenses, not 6.)
*THEN start thinking in terms of stocks, mutual funds and so on.
Our experiences with financial advisors have not been good. Generally, they were far more interested in the money they were going to earn off us, versus the money we were supposed to be earning, thanks to them. If you really want to go this way, I would INSIST on making sure they’re licensed, and ask for references.
If you live quietly and don’t throw your money around, those ‘fair weather’ friends and relatives will gradually fade back into the woodwork. Practice on saying ‘no’ gently. Maybe take them out for lunch or a cup of coffee — at the least, you could do that. Tell them you’re putting your life back together. That you believe in personal responsibility. Then once again, practice saying NO — even to yourself!
What an opportunity! Hope you use it well.
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It’s simple. Don’t spend it and put it in a savings vehicle that’s hard to get to. A financial planner can tell you if necessary.
Smack the hands of friends/family who stick them out in fron of your face. No is a great word. Use it liberally.
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