Deciding what to do with new money
As the average global population continues to age there will be greater instances of wealth transfer from the old to the young. Most people will come into a bonanza sooner or later. Maybe it’s $5,000, or maybe it’s $500,000. Whatever the amount happens to be, it’s essential to grasp the significance of this opportunity and not squander it. A dollar saved is worth more than a dollar earned because of income and payroll taxes.
There is no shortage of questions on the internet that has the renowned format, “I have $X amount of money. What should I do with it?” The following snippets are taken from Reddit.
First of all, congratulations for saving, earning, inheriting, winning, or however else you came into the money. 🙂 The simple answer to what you should always do with your new found fortune is this: Maximize the utility of that money based on your personal core values and financial situation.
But that might be easier said than done, so let’s elaborate. Maximizing utility means making the best use of that money and stretching the value of each dollar to its greatest potential. This is determined by your values and financial affairs, and to a degree, the current state of the economy. Values drive motivation and we’re all motivated by different things. Wanting to retire early requires a different set of values and financial strategy than becoming a home owner. Understanding your financial situation means knowing what money means to you.
The answer should always be clear. If we’re not sure what our values around money are or how to best use that money, then we should keep our windfall in a high-interest savings account for the moment while we do some introspection. We have to balance what we need right now with what we’re going to need in the future. For example, maybe we want to use a portion of the money to create a rainy-day fund to ensure against any immediate financial emergencies, and use the remaining amount to buy “passively managed” funds. We can split it 3 ways: 50% in an S&P 500 fund, 25% in an international equity index fund, and 25% in a bond fund. Vanguard offers some low-cost ETFs that are quite popular among beginning investors. I personally hold some VOO. But this is just one example. We all have different goals and requirements in different stages of our lives. We can use the savings prority chart to help determine what’s more important to us. And feel free to browse some financial related subreddits to see what other people have done in similar situations.
My Personal Thoughts
I like to think of a windfall not as money per se, but more as a perpetual generator of income. 😀 Money used up now is gone forever. But a money producing machine will last a lifetime. 😉 As I explained in a previous article, we can easily turn today’s savings into future incomes.
If I’m given a pile of money now, I’d use it to buy dividend aristocrats with an average yield of 4% or higher, which should continue to grow over time. For example, next month I’ll be receiving close to $5,000 in rental income from my farmland which doesn’t happen very often. I won’t have to think about what to do with this money because I’ll immediately put it in my investment account and buy more shares of dividend growth stocks that I already own. This will boost my annual dividend income by at least $200. Then I’ll have the pleasure of deciding how I want to spend the extra $200 I receive each year! 🙂
Whatever we decide to do with our stroke of financial luck has to be our own decision. It’s important to be patient and not rush our choices. A pile of money earning only 1% interest in a savings account while we take days, weeks, or possibly even months to do some research and personal development work may sound boring. But we have to understand what all our options are in order to make the right decision. It’s better than making the wrong decision and losing some of that money in investments we don’t understand or making purchases we’ll regret later. 😛
Random Useless Fact: