What to Do with a Windfall, Part II

Your windfall cash is safe in an insured bank account, or several, but not earning you much. Now what do you do with it? You've already paid off your debts.

Max out your retirement savings in a mixture of investment types. Any combination of individual stocks, mutual funds, ETFs, IRAs, T bills, and other types of investment will spread your risk, preserve your new capital, and, with luck, increase its total. Do not put all of your windfall in any one investment type. Be leery of anyone who approaches you or advises you to put large chunks of cash into any specific investment. Even an investment advisor you pay a fee to work for you might be more interested in earning high sales commissions than in steering you to the investments that are most profitable for you. There are the outright crooks to beware of, too. Go with your gut. If you don’t understand an investment or don’t trust the person advising you, back away. If you trust the person but the investment scares you, also back away.

Does it make sense to pay off your home mortgage, or to buy a house outright if you are currently a renter? Should you refinance your mortgage and toss in some of the windfall to increase your equity? These issues are determined by your future plans. Do you want to stay in this house, this apartment, or this area for a substantial number of years, or until you die? If not, then consider what kind of housing your windfall could help you obtain somewhere else, and how tied into your current area you want to be right now. Ownership of real estate, as we have seen lately, can be a negative. It can also be a delightful positive. You can buy a house or condo with a mortgage; you don’t have to pay it all up front. Keep the cash that would pay off the home in a safe account that earns you some interest or dividends. Best of both worlds.

Perhaps you want to start a business, and the windfall could be your seed money. It’s usually best to start a risky endeavor using other people’s money, but you might want or need to capitalize some of your new business in order to retain a large enough ownership share and to attract venture capital. But putting all your money into a new business, or using your money as the only capital for that business, is not a smart move. If you believe in your idea, others will, too. Formal venture capital, informal arrangements through Kickstarter or other Internet loan mechanisms, or going into a deal with partners (protected of course by a lawyer-written partnership agreement) are possibilities once you arrange your windfall to cushion your basic living needs.  

Perhaps you want to quit your job and write a book or invent something and this money could support you during the years it will take you to complete your project. Perhaps you’d like to go to school, or get a graduate degree, and your windfall will provide the cash for tuition and living expenses. The windfall acts as a temporary cushion while you pursue your immediate goal. The trick with this plan is to make your goal one that can be achieved in a specific number of years, ideally no more than five or seven. Then do the math. Will your windfall money last that long, paying for everything you’ll need or want during that period? Or will you have to come up with other money to make it work? Again, it is wise not to use all of your windfall on one project. After seven years, you’ve graduated from college and gotten your advanced degree, debt free, but it would be good to still have some of your windfall left while you decide what next to do with your life. Sounds like fun, regardless, doesn’t it?  

Maybe you’d like to buy a boat and go fishing for the rest of your life. First do the calculations to cover health insurance--including long-term care insurance--and living expenses for the rest of your life. Depending on the size of your windfall, there are two ways to calculate this. If the windfall is massive, there is a chance that if you invest it carefully, you can live off the interest or dividends from your investment the rest of your life without even touching your principal. Or, you can treat it like an IRA, invest it and draw out the typical annual minimum of 4% per year that most financial gurus say is a safe figure. Again, your principal remains undepleted because investment gains cover what you withdraw. Annuities might also be useful in planning a future of leisure, but they are expensive and don't give you full-time access to your money.

Finally, ask yourself if you want to spend all of your windfall in one place. Probably, you don’t. Paying off debts is wonderful but most people also want to buy themselves some toys. Buying a new house is fun, but people usually want a new car to go with it. And so on. Spreading your windfall over several projects probably will result in the most happiness. Why? Because almost any area of interest can absorb an amazing amount of money. Your 401k or IRA is a money hog; it’ll take all you have to give and you can still end up feeling you haven’t funded it sufficiently. An apartment in Manhattan can easily cost several million dollars. It’s possible to have $20 million and still not have enough money to buy that dream house—if your dream home is the modern equivalent of the palace of Versailles.

It is not necessary to run yourself out of money to feel you have used it wisely. Decide how much you must apply to your various wants and needs to cover them and to leave you with a sense of contentment. Your windfall should give you contentment, even if it’s not big enough to allow you to purchase an enormous yacht. Maybe it’s enough to rent a yacht for a month or two, to check out that style of living. Same thing with a private jet. Go for new experiences rather than accumulating property it will cost you to own and maintain.

One more thing. If your windfall money is blood money, get some of the taint off by doing good with it. Once you take care of your debts, your living expenses, and your financial future, look around for worthy causes to donate to, people to help, or something valuable to build that will enhance your community or the world. Some possibilities are gifts to higher education, challenge gifts to motivate students to excel, buying and rehabbing a significant historical building, or donating to medical research. Bill Gates and Warren Buffett, with all their billions, can’t save the entire world themselves. You can help. Make the money that came at a high price worth something by using it to create something positive.  

What to Do with a Windfall, Part I

Windfalls do happen. A relative dies and you inherit some cash. You get an insurance payout. You sell something for big money. You get a large cash bonus from your employer. You win a lawsuit. You get a lump sum distribution on an investment. You win the lottery.
  
What do you do with this money? You never planned for it. It's not in any budget. Sometimes it's an enormous sum, which is even more terrifying. It's more money than you ever saw in one place in your entire life. What do you do with the money?

First, take a deep breath. Put the money in a federally insured bank account that pays interest. If it is over the amount insurable by one bank, create several bank accounts at different banks so the money is fully insured. Then take another deep breath. Your money is safe. It might not be earning you much of anything at today's interest rates, but it's still completely safe. If you do absolutely nothing, your money will still be there. If your windfall occurred because of some tragic event, take your time deciding what to do next. Allow yourself to heal a bit before you tackle what to do with the money. It’ll be there when you are ready.

Next, make a list of all your assets and all your debts. Everything. The car loan, the mortgage, the 401k, the college tuition fund, the college loan, credit card balances, what you owe your brother, everything. In other words, determine your current net worth. If your net worth is negative, it’s pretty obvious that you’ll need to use some of your windfall to pay down debt. Do it wisely. First pay the credit cards and the student loans, both of which have the potential to increase their interest rates and haunt you for decades. Car loans should go next since vehicles are a depreciating asset. After those immediate needs are taken care of (and you’ve paid back any relatives or friends to whom you owe money), you need to think.

Take your time again. Even a million dollar windfall starts to look like peanuts when you divide it by the number of years you can expect to live. If you have another 60 years to go, that cool million is only $16,667 per year, not including any earnings it generates. Not a fortune unless you can turn it into a lifelong moneymaker. What you want to do with the windfall is determine how it can change your life for the better.

Depending on how public your windfall is, you will likely be inundated with pleas from family and friends for loans or outright gifts, plus from total strangers who want you to pay for their medical bills. Do not yield to guilt-inducing pressure. Few of these importuning individuals will have your back if you run out of cash. Their pleas are a distraction when you ought to be educating yourself about the best way to manage your windfall.

Here is where advice diverges radically. Some people will tell you to buy an annuity that will pay you an income for life. Others will suggest a deferred annuity that kicks in only when you are in your final years. Others will of course recommend the stock market, the bond market, or various other investments that are meant to increase capital but hopefully will also preserve it. Some people want you to buy life insurance. Others, most of them outright crooks, want you to invest in various get-rich-quick schemes or buy overpriced precious metals. That’s the problem with receiving a windfall. Everybody has a great idea about how you can spend it. Meanwhile, you're trying to cope with the shock of having all that money.

Next Post: What to Do with a Windfall, Part II

How to Throw a Good Wedding

This is about money, but only in a tangential way. If you intend to get married and do not want to spend the current American average of $30,000 on your wedding, you need to do some careful planning. Cutting out all your expenses yet expecting your friends and relatives to spend lavishly on you is not a plan. If you don’t want to order a $500 wedding cake, that’s fine, but you still have to provide refreshments for all your guests and no, that does not mean a cash bar. A wedding reception is a party. The ones throwing the party have an obligation to to entertain their guests. Making it clear in advance what the parameters of your hospitality will be is a kindness to all you invite.

And please, invite out-of-town guests only if you intend to be a good host to those guests. If you don’t want to speak to Cousin Laura from Topeka, don’t invite her, and don’t solicit her in any way for a wedding present, either. If you do invite her, you need to make sure she has a lovely time at your wedding.

Yes, I get that you are young, you are urban, and you’d really like to just have a big party with all your same-age friends. You’re okay with distant and elderly relatives showing up that your mother thinks ought to be invited, but you don’t want to spend your time with them. Here’s how to satisfy everyone:

1. Ask yourself if Cousin Laura from Topeka will be comfortable at that funky little bar down the street where you’d like to hold the reception. No? Then either do not invite Cousin Laura, or don’t hold the formal reception at a bar. Hold a wedding pre-party for your close young urban buddies at the bar, and find a formal wedding venue for the actual reception, one where older people and very young people who cannot legally enter a bar will be comfortable.

You cannot reasonably invite an out-of-town guest to only one part of the wedding festivities, by the way. If you invite Cousin Laura to the wedding ceremony, you must invite her to the reception, too. If there is a general party before or after, she should be invited to that. She just spent $1,000 on airfare, hotel, and clothes to come see you get married. You must show some class by making sure she gets her fair share of the wedding entertainment.   

2. Find a reception venue that will allow you lots of freedom. You don’t want to pay a fee per guest, because then you can’t invite little Susie, somebody’s five-year-old, even though little kids are hilarious fun at receptions. You don’t want to have to triage guests: “Is Joe worth $150? Do I like Rosie enough to pay $100 to entertain her for four hours?” Venues that allow freedom do exist, but it takes work to find them. Here’s a hint: a suburban home usually has a pleasant back yard and it is cheap to rent a tent.   

3. Arrange reliable transportation for all out-of-town guests throughout the festivities. This means someone picks them up at the airport, drives them to the relative they’re bunking with or the hotel they’re staying at, and drives them to all the wedding events. It would be a kindness to arrange a free place for out-of-town guests to stay, but it’s not necessary. It’s essential that you arrange transportation in case they are too old to drive or would be lost trying to drive in your city.

4. Buy food, and lots of it. At all weddings, the guests descend on the food like locusts. The trick is to not pay a per-plate fee to a caterer or use table service. Instead, arrange for platters, large containers, etc. at a buffet. You’ll still have to pay someone to set up the food and keep it coming, but that costs far less than waiter service, and there is less wasted food. Think simple but bountiful when it comes to food. You’ve seen or participated in elaborate tasting rituals and considered very elaborate foods, but the truth is most guests would prefer food they recognize. Wedding guests are perfectly happy to eat quite ordinary food if there’s plenty of it. Your local grocery chain's bakery can turn out a creditable wedding cake that will please most cake-eaters.

You also need to remember to arrange meals for out-of-town guests or give them a program in advance so they know when food is available as part of the wedding and when they are on their own. Remember that when you hold a party—and that’s what a wedding is—you are responsible for offering refreshments to your guests. BYOB does not work at a wedding.

5. Provide seating. At the ceremony, make sure there are enough chairs for everyone. For the reception, rent or borrow enough chairs and tables for most if not all of your guests. Don’t worry about decorating the tables or creating seating arrangements. It’s enough to have a place to casually sit down to eat. Ideally, at a party people get up and mingle, or get up and dance.

6. Get some music. It’s an event, and it deserves music. It only costs a couple hundred dollars to hire an organist who can play conventional wedding tunes before, during, and after a church ceremony, because wedding ceremonies themselves are short. It costs nothing to get a friend to bring a boom box to the party venue, or to get a knowledgeable friend to bring a more elaborate system. Have it tested in advance, of course. Bottom line, you do not have to hire an expensive DJ who will play inappropriate music too loud for your guests to talk. You do not have to provide a dance floor. People who want to dance will dance anywhere, as long as you provide music.

7. Speak to every guest you invited. Yes, you’d prefer to hang with your friends, but you must greet Cousin Laura and thank her for coming all this way, and extend your hope that she’s enjoying herself, plus introduce her to your new relatives. This is part of being a good host or hostess, especially when a friend or relative travels a long distance to your wedding. It’s your job to show hospitality to your guests.

8. Provide much more food and drink than you think any reasonable crowd will consume. (Have I said this before? Yes? That’s because food and drink are a key part of any good party.) If you don’t want to pay for alcohol, provide some other liquid refreshments, and plenty of them. 

Finally, try not to be too selfish. Sure, it’s “your special day,” but the truth is it’s your family’s special event, and you are putting your friends and relatives to significant expense and often inconvenience to be there for you. So be kind, be present, smile at everyone, dance with the little kids, and have a good time.       

How to Deal with Medical Bills Update

Here’s something I wasn’t sure existed anymore: Hospitals that will forgive big bills incurred by people who have no money to pay them.

Someone I know recently got a letter announcing that the hospital that was owed over $45,000 has granted this person “charity status,” and quashed the bill. That’s right: 45,000 big ones.

This is a very interesting category of medical bill outcome, because it does not involve the IRS. The medical provider simply wipes out the bill, and the person who owed that money no longer owes it and does not have to pay income taxes on the forgiven amount.

Charity status is a very different situation from one in which a credit card bill has been written off. The credit card company will issue the person a 1099 showing the written off amount as income. The person who could not pay, say, $900 on a credit card, will now have to pay income taxes on that $900. Depending on how down-and-out the person is, that might end up being zero in taxes, but it might be as much as 30%, because for sure if the federal government considers it taxable, so will a state government.

So, it seems to me, given these two very different tax results, people who have medical bills they can’t pay (and know they never will be able to pay) should ask the medical provider to be granted charity status. Not a write-off.

Try it. It never hurts to ask. Apparently, there are still some good people left in this world.

Why Apple CAN Improve Chinese Labor Practices

This NY Times article, The Dilemma of Cheap Electronics, about Chinese factory labor versus prices on Apple products deserves a reply and here is mine:

The answer is simple because each new piece of electronics gets priced at whatever the manufacturer chooses, and there are many new pieces of electronics year after year.

Apple can easily say the iPad 3 will cost $100 more, and make sure that $100 is in the cost of the factory labor. Because a new technology is being introduced, people will buy it regardless of the price. Yes, undoubtedly there is market research telling Apple at what dollar figure American consumers are price resistant, but of all the companies, Apple is the least concerned with price. Apple sets the new standard of pricing with each new product.

Work from this premise and you realize that every American company with factory workers in China can raise their prices easily. And that approaching Apple, the least price-sensitive company, is the right tactic.

The next part of the problem is to shake down the Chinese factory owners who are making huge profits off the backs of their workers. That's harder to control. No doubt the owners will want the same percentage of profit as in the past. In other words, $99 out of every $1 price rise, or whatever the outrageous figure is. Making that profit and loss statement look different is a much harder trick to pull off, but the threat of going somewhere else is Apple's great leverage.

Bottom line, Apple has the power, and Apple ought to be pressed to make things better. Why not? Every Apple product we buy means a number of Americans who don't have factory jobs. Apple owes its customers some portion of peace of mind about the people it does employ in factories.