“Impulsive decisions are soon regretted, so take your time with financial decisions.”
– Kate Phillips, Total Wealth Coaching
It’s the problem everyone wants to have: how should you spend a large additional sum of money? Expected or unexpected, the result of an inheritance, business deal, or the sale of a company, home, or other property, there are some things you should know.
First, be intentional. Even if the windfall is more money than you ever thought you would have, if not managed intentionally and with care, you risk looking back one day (perhaps sooner than you think) with regret. Just google “lottery winners who lost it all” for examples of what not to do. (Better yet, read the eleven ideas below for putting the money to good use.)
Secondly, use your head and your heart. You want to make financially savvy decisions, but there’s more to money than simply math. Decisions are emotional as well as logical, and whatever you decide to do with it, make sure both your head and your heart are on board.
Third, don’t be in a rush. If you’ve lived without the money until now, spending several weeks, a few months, or even longer to decide what to do with it could serve you well.
Lastly, spend wisely. While that may sound subjective – and it is – think of it this way: spend your money in such a way that you’ll have few, if any, regrets. You could fritter the money away on impulsive consumer purchases and eat out every night for the next few months, but you might feel like you’ve got “nothing to show for it” down the road. And perhaps, with the same dollars, you could have created a lasting income stream, honored your deepest values, or created memories to last a lifetime.
There’s a simple key to spending wisely: think long term. Even if you decide to spend the entire amount in the next six months, will you look back 20 years from now and feel the money was put to good use? If the answer is no, go back to the drawing board.
Here are 11 ideas to make the most of a lump sum:
1. Free your income.
If you’re using your current income to pay off high-interest debt such as credit cards or other debt with double-digit interest rates, using some of your cash to eliminate or decrease that debt makes a lot of sense. And not only do you have monthly payments that may be a burden, you also have opportunity costs. What could you be doing with the money if you didn’t have credit card payments?
2. Create cash flow.
Unless you have more income than you know what to do with already, creating cash flow is an excellent idea. By putting your dollars to work for you, you’ll have more dollars in the future, and more choices of how to spend them!
What’s the best financial strategy for creating cash flow? We recommend becoming a private lender. If you’ve got $25,000 or more, we can give you some options, some of which include a contractual guarantee to receive 7% or more, annually, in regular monthly checks on a first position deed of trust.
Have $100k or more? Your options – and of the rate of return you can earn – increase substantially if you are an accredited investor. In the current environment, you can expect to earn a return in the low double digits.
What if you just have, say, $5,000, but you’d still like a little cash flow? We recommend peer lending, which allows you to lend as little as $25.00 to someone else who is looking for a loan. Websites such as LendingClub.com or Prosper.com make it easy for both lenders and borrowers to do business, removing banks as middlemen and increasing returns for those lending while decreasing interest rates for the borrower.
3. Put a down payment on a property.
While we don’t believe you have to have a 20% down payment before you quit throwing money down the rent drain, if your windfall can get you to (or closer to) the 20% mark, you’ll be way ahead in the long run. And if you already own a home, it could be a fantastic opportunity to invest in rental property.
A healthy down payment can help you:
- eliminate mortgage insurance. This is insurance for the mortgage company should you ever default on your mortgage. For you, it’s just money you’ll never see again.
- expand your asset base. A down payment enables you to use a mortgage as leverage to purchase a larger asset. You can control a $500k asset with a $100k down payment.
- strengthen your offer. If you’re living in a hot market, it can be more difficult to make an offer with a small down payment. Sellers and brokers tend to not take minimum down offers seriously if there are stronger offers on the table, due to concerns that the mortgage could fall through.
4. Invest for long-term growth.
Don’t need the cash flow, but you’d like to grow your net worth for the future? We recommend considering life settlements; which could be the best investment you’ve never heard of! They represent the secondary market for life insurance policies and allow you to invest in something that is virtually guaranteed to be worth more in the future.
While life settlements are not well known amongst all individual investors, institutional investors such as pension funds, even major investors such as Bill Gates and Warren Buffett (through Berkshire Hathaway) have been investing in them for years. Over time, life settlements tend to deliver equity-like gains without the risks of stocks.
5. Increase your net worth.
Let’s say you just received a windfall of $50,000. Obviously, your net worth has just increased by $50,000! However, perhaps you’d like to use that money to multiply that $50k and increase it further.
The best financial vehicle for increasing the worth of your estate instantly is life insurance. We recommend whole life insurance so that the increase in net worth is guaranteed, permanent, and easily transferable with no (or minimal) taxation.
We often receive questions from people who would like to purchase life insurance with a windfall. And while it is possible to do that, in general, life insurance is better designed for ongoing payments than large lump sums. Yes, there are single premium policies available, however, they don’t provide the flexibility and the taxation that most of our clients desire. (We’ll have a future article about this, and in the meantime, you’re welcome to contact us with any questions.)
We believe a better strategy is to become a private lender (see number two), turn a lump sum into an income stream, then to fund a long-term whole life policy with that income stream.
6. Start a business.
There’s no better way to create long-term prosperity than to have control over your income. One way to control your income is to own your own business. As Kate Phillips argues in “Why Entrepreneurs Rule the World,” perhaps traditional employment is actually riskier than owning a business, because oftentimes, your entire income can be eliminated with the decision of one or two people. Yet when you’re a business owner, you can have many clients and multiple streams of income.
Even if you love your job and don’t want to give it up, you can create wonderful tax write-offs through having a legitimate business on the side.
7. Take care of business.
Already have a business? You can be your own investor and increase your profitability and stability in many ways. Some ideas:
- invest in a coach or mentor
- expand your marketing
- improve your website
- increase your inventory
- hire new talent
- upgrade your technology
- purchase new equipment
- pay taxes (or set aside funds for future taxes).
Take care of your business, and your business will take care of you!
8. Make a difference.
What are you truly passionate about? Maybe it’s supporting your faith, solving world hunger, or caring for animals that were mistreated. A windfall is a fantastic opportunity to put your dollars where your values are.
The simplest way to do this is to make a donation. Even more impactful ways to make a difference could include making a sustainable donation (creating cash flow through an income producing asset, then donating the income stream), and/or creating a legacy by including one or more charities as a beneficiary of your life insurance policy.
9. Fulfill a lifelong dream.
Perhaps you studied abroad in college, and you’d love to return for a month to visit the friends you made. Maybe you’ve always wanted to take a sabbatical to write a book, dive the Great Barrier Reef, attend spring training, or take your kids on a trek into the Grand Canyon.
One word of advice: you’ll likely be more satisfied with experiences rather than purchases, according to research on money and happiness. We tend to adapt to material purchases, which tends to provide temporary satisfaction, while experiences can meet greater psychological needs and provide more lasting satisfaction, according to research from Dr. Thomas Gilovich of Cornell University.
10. Learn something new.
Spending money can help you have things. Money can also allow you to do things. And money can also help you be someone you’ve always wanted to be through expanding your skills, knowledge, and training.
Want to be adventurous? Learn to sky dive or fly a plane. Want to be more creative? Take a painting class, cooking class, or music lessons. Opportunities to learn are everywhere, through local classes, mentors, online courses, certification programs, and simply learning by doing.
A substantial windfall could even be an opportunity to go back to school and obtain a degree. Perhaps you work in construction, and you’d rather be the architect designing the buildings. Or you’ve become really good at helping people solve personal problems as a hairdresser, and you’d rather get paid as a psychologist now.
11. Keep it!
There’s no rule that the money has to be spent on anything. And if you’re someone who keeps “meaning to get around to saving up that emergency/opportunity fund,” well, this windfall just might be your shortcut!
And while we generally recommend dividend paying, high cash value whole life insurance as an ideal place to store cash, even before you build your cash value account, you should have some savings to get you through “everyday emergencies” in a bank account, credit union, and/or in cash (stored safely in an easily accessible place).
As I explain in Busting the Financial Planning Lies, without savings, it can be very challenging to get ahead. Everything’s is “OK” only as long as everything is OK. But when the car breaks down, the roof leaks, the dog needs a vet, or you have a happy emergency, such as the opportunity to join your friend in Maui for a week (and they’re paying the oceanfront hotel bill, you just need airfare and spending money), that’s when we tend to use our credit cards and move backwards.
Having savings is the foundation upon which financial prosperity is built. So if you haven’t had a financial buffer or emergency fund, it’s possible that the best way to spend your sudden cash is not to!
What will you do with your windfall?
We hope we’ve given you some good food for thought! Of course, we are your partners for prosperity, and we’re here to help! Contact us today, and together, we can get your dollars working harder for you.