There’s a show that comes on cable every now and then called “How Winning the Lottery Changed My Life.” The show focuses on past lottery winners – and, for the most part, how they squandered their millions.
It’s unfortunate, but 95% of lottery winners are bankrupt five years after winning the lottery. People who receive a financial windfall in the form of a settlement don’t seem to fare any better.
I don’t know the actual statistics, but I personally know only one person that received a windfall and did something intelligent with her money.
Managing money is not something that comes naturally to most of us. Good money management is a skill that is taught and learned over a period of time.
I want to tell you a true story about a couple that I know of who came into a large sum of money some ten years ago – and how they blew the whole thing.
When average people experience a $5,000,000 windfall, it is usually the result of either a lawsuit or a lottery win. In this particular case it was a lawsuit. After years of deliberation, a settlement was reached, and the couple was awarded $5,000,000.
The first thing they did was buy five brand new cars: an Audi, a Mercedes, a BMW, a Porsche, and a Range Rover. Then they bought a house in Florida for $1,500,000, because they had to have a four-car garage to park their cars in. To furnish the inside of their house they spent $100,000. To beautify the outside, they spent $90,000 on landscaping.
At this point, we are already down to around $3,310,0000 – and there have been no investments made. Not one.
Property taxes, and maintenance on the property, came to a few grand per month. By “a few grand”, I mean close to $5,000. That’s $60,000 a year just to maintain your home!
In addition, let’s not forget that they had to buy each of their adult children a car – and take many fabulous, luxurious vacations.
Now, by no means am I suggesting that you not enjoy your newfound wealth. You should allow yourself to experience all the wonderful things you would not have been able to otherwise!
However…there is always a smart way and a not so smart way of doing everything in life.
The smart way enables you to do the things you want to do without going broke.
The not so smart way simply leads you to the poorhouse.
One of the main reasons I think people lose their minds when they come into a large sum of money is its liquidity. Liquidity is the ease in which something may be converted into cash. What could be more liquid than cash?
Remember when you were a child and your parents gave you a dollar bill? That dollar bill burned a hole in your pocket. You couldn’t wait to spend it.
Having large amounts of cash can be intoxicating to people that have never had money before. All they know how to do is spend.
Well, I have a theory as to how people that find themselves in this situation can overcome the urge to spend money senselessly.
Like anything in life, it is about your perception.
People with newfound wealth tend to have the wrong perception when they come into money.
I often tell people that if you come into money, you should treat it as though you inherited real estate.
For example, lets’s say your long lost uncle died and left you an apartment building worth $5,000,000. That’s great! But the apartment building is not a liquid asset. You can’t just go out and start buying things with it. For all you know, the building could be underwater, and you could actually owe more than what the building is worth!
In this hypothetical scenario, that’s not the case; the apartment building you now own generates $30,000 a month in positive cash flow. Positive cash flow is the difference between your income and your monthly expenses.
That $30,000 is all the cash you have access to on a monthly basis. You can still blow the entire 30 grand each month you receive it. But you’re less likely to stretch yourself beyond what your monthly cash flow can cover. You’re kind of forced to be disciplined with your spending.
The importance of viewing windfall money as a non-liquid asset is paramount in your ability to build and hold on to wealth.
That’s how Warren Buffett views money – as a vehicle that is a means to an end. Not as a means to buying anything you can get your hands on!
My book, The Stock Market is For Everyone, is a short guide for the beginning, inexperienced investor that is easy to understand and can be put into action immediately.
Click the image of the book at left to be taken to its Amazon page. (Disclosure: As a participant in the Amazon Services LLC Associates Program, I earn a small commission on each sale generated through these links.)