If you’re fortunate – or unfortunate, depending on how you look at it – you may one day experience a sudden windfall.
A windfall is an unexpected cash injection, usually in the form of a settlement from a lawsuit or an inheritance.
Throughout the course of my life, I have seen a number of people come into a considerable amount of money, only to squander it. They spend the money on things like shopping sprees, buying a brand new car (or cars), and giving to family members.
Once your purchases are driven by emotion, it is almost a foregone conclusion that you will not make smart choices with your newfound wealth. Here is a real life example:
A couple I know of was awarded $1,500,000 in the early 2000s. The first thing they did was go to Fifth Avenue in Manhattan and go on a shopping spree at some of the most expensive stores. They bought two cars and moved to Florida.
Now, buying real estate is never a bad idea if you suddenly come into money. However…financing a property, at the height of the real estate bubble in 2006, can become a bad idea.
Instead of paying straight cash, as I would have, this couple financed a $300,000 home that proved to be a disaster. They also spent a great deal to furnish their home, as well as thousands on landscaping.
Within a few years, they had almost depleted their windfall.
To make matters worse, the $300,000 house they mortgaged was underwater. That means the amount they owed was more than the house was worth.
Eventually, they ran out of money and had to move back to New York in order for the wife to find a job.
This is a very unfortunate series of events – but a very common one among people that come into a large sum of money.
What would I do with a windfall of $1,500,000?
Here it is, plan and simple:
- Half of it, $750,000, is going into the stock market. Listen: one million dollars is not a lot of money any more. I might be able to 10X the $750,000 over the next 20 years, bringing me to $7.5 million.
- I’d use $400,000 to purchase a business that generates positive cash flow of at least $10,000 monthly. My first goal is to become financially free, i.e. not have to go to work at a job anymore.
- $100,000 would go into a college fund for my daughter.
- I’d put $250,000 into real estate.
A sudden windfall can be very exciting indeed. Unfortunately, most people squander the money because they simply don’t possess financial literacy.
If you come into money and don’t know what to do, do nothing. Seek out financial advice from someone you can trust. (Hint, they’re usually not broke.)
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