A couple of weeks ago, someone won a nearly $600M jackpot — though it was “only” $380M if they took the lump sum cash option.
And then, a few days later, the news broke that Yahoo! was buying Tumblr for cool $1.1B, making their founder fantastically wealthy.
Time and again, you’ll see stories about fortunate folks who receive a major windfall. Maybe not hundreds of millions of dollars, but a life-changing sum just the same. Sadly, many of these same folks go broke almost as quickly as they made it big.
With that in mind, I’d like to spend a bit of time talking about how to handle a sudden windfall. And no, I won’t be dreaming up a hypothetical list of thing that you should do if/when you receive a windfall. Instead, I’ll talk about the things that we did do when it happened to us.
For context, my wife and I sold a small business venture a few years back. This was something that I had built alongside my full-time job. It ultimately grew to the point where we couldn’t manage (or take full advantage of) it ourselves, so we started looking for an exit opportunity.
No, we didn’t pocket hundreds of millions of dollars. But still, it was a rather large payday, at least by my standards. So how did we react?
- We took our time. We parked the bulk of the money in CDs and gave ourselves some time to digest everything that had just transpired.
- We kept our mouths shut. We didn’t advertise the fact that we had just scored a sizable payday. In fact, to this day, we haven’t said much of anything to anyone.
- We paid a bunch of taxes. This is a key point. Don’t forget about possible tax obligations. An otherwise large number could be a good bit smaller by the time you pay the taxman at the end of the year.
- We paid off our debt. We’ve never carried any consumer debt, but we did have a mortgage. We had previously been working to pay it off early, so we took this as an opportunity to knock out the balance in one shot.
- We re-considered our need to take risk. When the dust settled, we re-evaluated our investment goals and deciding to adopt a less risky allocation. It wasn’t a huge change, but it was a change all the same. In the end, we went from 70/30 stocks vs. bonds to a 60/40 allocation.
- We invested the money. Once we had re-worked our target allocation, we put the money to work. And we did so in the same boring, vanilla investments that we’d been using all along (see Our Investment Portfolio for details).
- I kept working. Even though I may have been able to quit my job, I didn’t. I like what I do and we weren’t interested in rolling the dice with four kids still at home and their college costs, etc. still in our future.
- We’ve continued to save like mad. Since I still have a full-time income, but we no longer have mortgage payments, we’ve been able to really ratchet up our ongoing savings. That includes the funding of all possible tax-advantaged investment accounts that we can get our hands on.
- We take time to enjoy ourselves. All of this being said, yes, we do take a good bit of time out to enjoy ourselves. Our recent trip to Disney World is a case in point. I’m also a sucker for time at the beach.
I think there are some important lessons here. For starters, don’t rush into anything. Act slowly and deliberately. Moreover, if you don’t advertise your situation, you won’t end up being pressured to take advantage of “opportunities” that are, more often than not, better left alone.
Ultimately, it’s important to do what’s right for you. In our case, we decided that it was best to pay off our mortgage and (slightly) ratchet back our risk profile. But we saw no need to make our investing life any more complex since the portfolio that we’ve constructed works quite well under a wide variety of circumstances.
Oh, and while you should feel free to enjoy yourself, take great care not to get overextended. As tempting as it might be to buy a lake place or a condo at the beach (or whatever), I much prefer to rent our fun. Let someone else deal with the maintenance and upkeep while you maintain flexibility.
There are certainly people out there who will disagree with aspects of the above, especially with respect to our decision to pay off the mortgage early. That’s fine. I fully understand the arguments to the contrary, and I can honestly say that we haven’t regretted our decisions one bit.
As an aside… Yes, I realize that we were in a somewhat unique situation in that we already had a plan in place. Many people don’t. To people in that situation, I would say: take your time, keep quiet about your circumstances, and educate yourself.
Everything else can wait.
Speaking of education… If you’d like a crash course in personal finance with an eye toward investing, I would suggest starting with the following three books. And I would recommend reading them in this order:
The Boglehead’s Guide to Investing is another great choice. There are, of course, many other excellent books out there (and some real stinkers). But these books will provide you with a solid foundation in terms of both mindset and mechanics.