Wednesday, November 14, 2012

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.  

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