Advice from a Billionaire: What to do With a Windfall
Published on - November 17th, 2010 (by J.D. Roth) 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.)
Forbes
You have $100,000 — where do you put it?Cuban
First I pay off all my credit card debt and evaluate paying off any other debt I have. What I have left I put in the bank.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]
This article is about Gurus, Odds and Ends
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Then the key is knowing what constitutes a good investment … and being in a position to take advantage of it.
The second key, according to Buffet, is focus. “If you have a harem of 40 women, you never get to know any of them very well.”
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‘Cash is King’ – couldn’t be truer, especially in the current period we are going through!
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This is interesting as the advice here is opposite what everyone was spouting a few years ago (pre-recession) which was its better to be in the game (stock market) than out of it. He seems to be saying it’s better to sit on your pile of cash rather that put it to work, cause you’ll end up ahead if the market dives. Of course the its better to be in the game than out was advice that was opposite its previous era where people would rather sit on their pile/egg of money. Seems all the advice wealthy people can give is what you should’ve done! Well as the saying goes hind sight is 20-20 and anyone can see that’s what we all should’ve done.
As an aside, no I don’t think homes are half price now, they were just way too much before!
I thought I should explain a bit more what I meant. Obviously people who didn’t have their money in the market (sitting on the pile) are doing pretty well right now because the majority of the people had invested and now the value of their investment is lower. However, when the majority of people were sitting on their pile and the stock market was going crazy those that sat on their pile weren’t doing as good as those who were in the market. And it seems the advice always comes after such time when its too late.
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So what is the ultimate question?
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Looks like I should re-assess my priorities in that order. Doesn’t sound like a bad idea at all, especially since those are my goals!
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Mark Cuban is giving out sound advice. The problem is the billionaires are sitting on their cash, AND are getting the BEST interest rate dividends, not “nothing”.
If you billionaire and trillionaires want to help the economy, advocate reverse interest rate dividends, its actually in your best interest. The less you have, you get the highest interest rates. The more you have (I’m talking tens of millions and larger), the less interest rate dividend you get.
Funny how the economic advice may reverse every 5 to 10 years, but the richest always get the best interest rates, even when it motivates banks to eagerly foreclose on the poor and middle class to get the billionaires that higher interest rate dividend.
Did you know that in 2009 Bank of America actually charged more in fees in penalties than they gave out in interest rate dividends!
I can assure you it wasn’t the billionaires being charged the fees and penalties.
Here is a simple four point economic plan that would get the economy going in a steady and solid way.
http://wallstreetchange.blogspot.com/2010/11/2010-after-election-4-point-economic.html
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I don’t believe he actually said “Get out of debt, Build a budget, Save your money, Invest wisely.” Paraphrashing his answer to question #9, he said get out of debt, keep everything in cash, and spend wisely. In fact, investing and keeping everything as cash seem contradictory, so it would be odd if he advocated both at once.
Can we get some clarification here? If you can cite Mark Cuban advising that people put money into stocks or other risk-bearing investments, then it seems that his advice contradicts itself. If he didn’t actually say it, then “Invest wisely” should be removed from the list of Mark’s recommendations.
Unless there’s something else I’m missing. =)
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@4 RP
The ultimate question in this list was actually a statement. “Name one experience every entrepreneur-to-be must have”
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RE: #6 Alessandro Machi
Please explain how its in the billionaire’s and trillionaire’s best interest to advocate reverse interest rate dividends.
I can see how its in the interest of those who don’t have piles of cash. But it doesn’t make sense if small denomination make the best interest rate then the wealthy just open up more accounts with smaller amounts in them to obtain the best interest rate. Also the reason they get better interest rates is because the banks can make more money from larger sums, the current system is in the bank’s and wealthy person’s best interest. I don’t see how advocating the opposite would do any good. That’s like thinking advocating the highly wealthy send a monlthy check to the poor is going to do any good. You can advocate all you want. Its not going to change the fact the wealthy do not want to take a loss.
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Don’t think Mark Cuban’s advice is all based on hindsight. In 2006 he wrote that the stock market is for suckers, and I think there is some truth to his ideas.
http://blogmaverick.com/2006/01/03/the-stock-market-is-for-suckers/
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@Curby (#7)
Maybe “use your money wisely” would be more accurate. You’re right that he advocates smart spending, but he also says, “Plus they have cash to invest if the market craters…” I may be mis-remembering, but I seem to remember that during the market meltdown of 2008, he was actively buying stocks…
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Is $26k a windfall? It sure felt like it when I was 25. And if you’re anything like me, you’ll take that $26k, move to Europe for a year, and travel your pants off!
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$26K is definitely a windfall!
Mark C is my favorite billionaire just because a) he was willing to go on Dancing with the Stars and b) he didn’t make an ass of himself in so doing.
I also like most of his answers to Forbes. All except the book-to-read. That shows a lack of imagination.
Re: investing: my 401(k) may be in stocks, but everything else is cash, cash, cash. If I might need it (or if an opportunity to buy real estate comes up) in the next ten years I want that money right where I can get it, in the same condition I left it!
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I have to pass on his advice to have cash sitting in a bank earning no interest. With money so easily moved on the Internet, why not have the cash in a money market fund at least earning a small percentage. I keep some of my cash in a 5-yr CD earning 2.7%. Sure, I lose 9 months of interest if I pull it out early, but that’s a small price to pay for an investment opportunity or an emergency need and the money is in my bank within 2 days. You won’t lose out on an investment possibility over a 2-day delay.
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RP says, “So what is the ultimate question?”
I’d like to know too.
But about having your money in the bank and being patient: I’m one who has never made over 30K in a year, but now financially comfortable.
It’s not doing the 9-5 that makes one rich, it’s being patient and acting when deals present themselves. Maybe I’m wrong, but people who I know that are wealthy, are ones who took chances and made it happen.
I believe Warren Buffett says that everyone in life will have 3 10 baggers. It’s a matter if we want to take advantage of serendipity or not.
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I took Cuban’s invest wisely to mean several things. First I thought he was talking about bargains – whether those bargains are in bulk and wholesale items like he mentions earlier – or in real estate, stocks, etc. I also thought the invest wisely part to mean invest in what you know. I invest in stocks and I’m an active trader – I time individual stocks regularly. I make money doing it…good money. I know what I’m doing despite the plethora of comments that will follow saying I don’t. But I think what Cuban refers to here is to do what you know. We all have different interests and strengths that can be parlayed into making money. So invest wisely…invest in what you know and understand. Warren Buffet says the same thing.
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@6 AM
“Did you know that in 2009 Bank of America actually charged more in fees in penalties than they gave out in interest rate dividends!”
I’m not sure what to make of this comment… Isn’t it assumed that BoA is a for profit business, and therefore would what to take in more revenue then they payout? I can’t believe this would be suprising
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I have to agree with Alessandro that a billionaire is not making “nothing” by sitting money in the bank, but I get what Cuban’s saying.
It is definitely good advice that you have to be able to take advantage of opportunities – like having enough cash set by to take advantage of foreclosure deals and finally start the rental empire you’ve always dreamed of. LOL.
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Keeping that $100,000 in cash is a sure way to lose your purchasing power, today or even ten years ago.
At a minimum that windfall should have been invested in dividend-paying stock funds, so even though the value is roughly the same as 10 years ago, you still got the dividend yield (higher than any interest rate, also taxed at 15% or less)
The world is awash in cash, and the Fed and other central banks are printing even more – I doubt unless you have several million (like Cuban) to play with you won’t be in a position to find any bargains.
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cash is king baby!
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Cuban has a point, but only if you are equipped to do something worthy with that “transactional value” they are keeping in the bank. In other words, if you are a wheeler and dealer who knows how to double your cash in one transaction. If you’re no good at making deals, I imagine you’re safer investing in a reputable mutual fund.
@Bill #19- Beware of this “loss of purchasing power” way of thinking. I grew up in a country with hyperinflation and you really had to buy the day you got the money or else it wouldn’t be worth much the next day. Funny thing happened– I never learned to save money, and it was very hard to acquire this habit when I needed it.
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@17 Jay – I found the remark on the penalties versus interest dividends quite shocking. The interest dividends are given since the banks can put your money to work via loans to other persons/companies. Similarly, if you have an overdraft on your current account, a negative interest percentage would make sense (seeing it as a short term loan). The fees that some US banks charge for dealing with overdrafts are quite ridiculous, and in no way relate to actual activities the bank performs for you in case of overdrafts. In the Netherlands, banks in general do not charge fees for overdrafts, only negative interest.
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@Bill in NC:
You’d only lose purchasing power in an inflationary environment. You’re correct that the Fed is printing cash like crazy, but you ignore the reason they’re doing so: They’re trying to stave off deflation. In a deflationary environment, cash grows in value.
I also disagree with your advice to invest the cash in “dividend paying stock funds.” Stocks, of course, can go down in value, so you’re putting your capital at risk. You note that the value is currently “roughly the same as 10 years ago,” then seem to assume that that would be the worst-case scenario going forward. But past performance is no indicator of future returns. Those stocks could still go down in value, steeply.
Cash is king. But if you insist on trying to grow it, then Mark is right – stick with vehicles that guarantee your capital. Money market funds, interest-bearing accounts, CD’s, T-bills, and the like.
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So the real story is:
take a risk and build an on line business you can sell,
Sell it,,
Make tons of money,
Buy a sports team and hope that sports continues to be a priority in the US instead of education,
Live flamboyantly,
Tell everyone else that cash (and not risk) is king.
I get it.
I see his investments as far riskier than the market or housing!
It takes money or great risk to get money- that is what my grandfather always told us!
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I like his strategy of having cash on hand to take advantage of sales and deals, because it scales so well…from micro-investments of only a few dollars all the way up to billionaire-scale acquisitions.
With interest rates so low, finding just one great deal on toothpaste can be worth more than the interest on several thousand dollars sitting in an account.
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My takeaway from this is the value of an “opportunity” fund. Once my emergency fund is in a good place, that’ll be my next goal. It’s nice to be ready when those opportunities come along, whether they are for stocks, houses, travel, or a great bulk price on something you use a lot.
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Yesterday I got an offer to upgrade some software I use to make a living for $200 instead of the previous price of $500. Having the cash set aside to do it it was nice. However, I wonder if I would have paid full price if I had more money set aside… having cash is also an opportunity to waste money in bad purchases, impulse buys, etc. Without discipline, the cash pile is like a pile of pastries asking you to devour them in one sitting.
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I don’t know why people have a problem with that advice. I’m a stay at home mom, met my husband while he was parking cars and driving a shuttle van. All he had was dreams and the ability to work and save.
Fast forward 15+ years and we live in a 3081 square foot house that we paid cash for. Drive a Toyota Sienna-paid for. My hubby drives a 2009 Chevy van for work (self employed)-paid for, and we have a good start on retirement accounts.
What did we do? We kept our debts to min. and paid if off quickly, saved cash so we had something to work with, and kept our eye out for investment opportunities.
I know we might be richer if we took more risk…but we might be poorer, and we are fine with the concept of “Get Rich Slowly” Last year we lost a lot of money from a firm we did business with because they took the risk, lived the high life and fell when the economy dipped.
We also lost a lot of money in our investment accounts so I’m glad that is not the only place we had money invested. Now, I’m not really sure what to do. Our business is not making a lot of money because of the economy. Should I sit back and wait? Invest more in stocks with the hope they rebound? I’m not sure but I guess I’ll have to close my eyes and swing at one of those balls eventually.
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Advising to get no return from your cash to maximize transactional value fails to make two important points.
1) Cuban is making his money doing something else (everybody has to earn their living *somehow*). He doesn’t need or plan (apparently) to make money with his money.
2) Maximized transactional value only brings a good return *IF* (I wish I could that that *IF* bigger…) *IF* you were going to spend the money that way already. This kind of advice is like saying, ‘clip coupons’. If you find and use an awesome coupon for $5 off the latest electronic doorbell but you weren’t going to buy that doorbell before, well then you just LOST money.
Does anyone really need to spend a huge windfall? I don’t. I pretty much have what I need. Anything beyond it is luxury. I don’t need to maximize transactional value. I already save money anyway. Having a windfall won’t change that much.
Of course, had I been unemployed and received a windfall, that would be different. Because, well, then it wouldn’t be a windfall. It would be income.
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@Curby Im not sure what you are hung up on, Cuban clearly states his purpose for keeping money in the bank is for “a good opportunity” mean that he is investing in SOMETHING. Obviously he doesnt specify here what investment opportunity may come along, but just like any investment opportunity it is most likely something that comes with its fair share of calculated risk and rewards. He clearly advocates keeping cash on hand so that WHEN that opportunity does present itself, he is in a position to jump on it
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About a year ago I wrote an investment plan for msyelf and my wife. Inside it I placed ten investing rules, sort of tidbits I’d picked up from GRS and other financial reading. One of my rules is:
4.Never make an investment decision in an excited/agitated state.
Whats it mean well basically if I’m looking at investing in something and I’m excited about it or agitated, it probably means the things very risky and I need to reevaluate why I’m doing it.
That’s what I took from this article investing is boring, it’s not exciting it’s about making measured decisions with the funds you have avaliable and understanding the risks involved.
I read over my rules before I make decision on where our money gets invested and if any of them raises a red flag in my head I stop and think things through.
I think this is also why we don’t see as many posts from JD any more the long term road is long and boring a post each month on “Today I shuffled another $XXX to my blah blah investments” or “I paid another $XXX extra of my mortgage” would get tiring fast I know for myself I find our regular monthly investment routine dull and boring but that’s the way it’s meant to be
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My 6 and 12 monthly investment evaluations are likewise dull and boring.
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In Response to John at #9, who was responding to my 4 point economic plan that requires no bailout. http://wallstreetchange.blogspot.com/2010/11/2010-after-election-4-point-economic.html
The world’s “wealth” dropped in half almost overnight in 2008. There are times when it IS in the best interest of the ultra rich to slow things down economically and ramp down the panic in the streets, they just don’t seem to know that.
I agree that the rich could pull shenanigans and put their savings in small amounts all over the U.S., but, that would be in violation of the law (if such a law were made) and at some point, when the rich got caught, they would look petty and greedy and that’s not always good for business.
The point of a reverse interest rate dividend system is it keeps more money locally, so communities can create their own local commerce again. Local commerce has been decimated by the digital age’s ability to create fake deals AND distant deals in way too short of a time frame.
High interest rate dividends to the billionaires suffocate local commerce in exchange for an international commerce that many times relies on child labor and other forms of worker abuse typically not found in the United States. Billionaires getting the highest interest rates on their dividends puts pressure on the banks to come up with high profit margin businesses, which usually require screwing over customers, workers, or both to achieve.
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Re Peggy #25 Great points, Peggy.
Cuban is talking about being “cash ready”. When a person is “cash ready”, they can get amazingly good deals from people who need a quick infusion of cash for product that they are “stuck” with.
People in the scrap business use cash to get amazing deals on pallets of “stuff”. They may buy $20,000 dollars worth of “stuff” for $1,000 cash.
Then they either quick sub sell it to other scrap collectors who want a portion of the pallet each, and maybe the original “investor” makes 5 grand on their 1 grand investment and the turnaround is quick.
Or, they can hold on to the pallet and sell the contents on ebay over the course of several months and eventually make 20 grand.
It just depends on the collector. The point is, they don’t get the pallet of useful scrap unless they have the grand, cash in hand, along with the built up connections and knowledge of who to parse out the scrap contents to. lol, I should add that not all scrap is useful so there definitely is a skill set involved in knowing what to buy and what not to buy, and for how much.
A lot of times, these buyer already know who they are going to resell the scrap to!
Instead of investing in the stock market, they are investing in the “stuck market”. People with cash can purchase content that others are stuck with, and then depending on their own experience, can resell it at pretty good margins.
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El Nerdo, you make a great point about wasting cash because one has it sitting there
. With “great cash reserves, comes great responsibility”.
It comes down to how much does one spend on “consumption” items versus buying items that create an opportunity to resell them at a nice mark up, yet the customer still appreciates the deal.
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Excellent advice from a person who saw a bubble coming and made out like a bandit (see broadcast.com).
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“Did you know that in 2009 Bank of America actually charged more in fees in penalties than they gave out in interest rate dividends!”
Not that hard to comprehend, Americans don’t save enough in banks. Instead they spend more then they have, get overdrawn bankaccounts, bounce checks and so on.
So it’s no wonder BoA made more on fees then they payed out in intrest on people’s savings.
Then again as A Swede I find the whole checking system stateside to be idiotic, and one bounce check costs 35$?
Here we have a system called post/bank-giro. each business have an account, you pay to that account, with a code for your bill and if you don’t have the money in the account on the day you specify the payment is too be made. It’s just not made. No fee’s, no fuss.
And you always know exactly when your bills are payed instead of the “send a check and hope for the best”.
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My dad followed this advice very closely and when he died there was a VERY nice nest-egg for my mom. VERY nice. Unfortunately, he barely shared his methods/techniques with me (I guess he thought I’d marry someone like him!) so now I’m trying to figure it all out. If I died tomorrow, I would not be leaving my husband a nice nest-egg at all, I’m sorry to say, except for the insurance policy. We’ll be getting rich VERY slowly over here, though I guess that’s what my dad did, too!
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Many people have a certin opinion about Mark Cuban, but you can not argue that the man is practical and intelligent when it comes to managing money and investments. I like how you applied the principles of a billionaire to the average joe, b/c thats all we are!
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For those interested, both Cuban’s blog and Get Rich Slowly are RSS backlinked to on http://www.swarmthebanks.com, (along with many foreclosure and economic blogs as well). Whenever either blog posts a new topic, it goes to the top of the column they are in on Swarm the Banks. (the same applies to the other blogs on that page as well).
I got a kick out of seeing Get Rich Slowly feature an article about Mark Cuban since both are on Swarm the Banks, and the article and subsequent responses turned out to be really good as well.
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I took his “cash is king” advice differently from most of the other commenters here. It seems he’s saying to wait until a truly great investment opportunity comes along, rather than just jumping into whatever investment is available when you get your windfall. And to do that, you have to have cash on hand.
Seems like solid advice–and something that I’ve always had a hard time doing.
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Alicia, share the love, others understood it as well. (ha ha)
In case anyone is interested, Bernie Sanders, congress person from Vermont just blamed the billionaires for our economic woes, which is what my four point economic plan already addresses. http://www.huffingtonpost.com/rep-bernie-sanders/the-billionaires-want-mor_b_786192.html
The difference is Sanders advocates a higher tax rate for the billionaires whereas my plan does not increase taxation on the billionaires, it just advocates a fairer distribution of PROSPERITY. http://wallstreetchange.blogspot.com/2010/11/2010-after-election-4-point-economic.html
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I had a few years of living expenses sitting in a bank account at the end of 2008. Very glad to be able to move aggressively into the market in a big way right then. But am thinking of moving some out right now. Dollar cost averaging? Nope, not for me.
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