When an unexpected windfall, dramatic increase in income, or sharp, upward change in circumstances of any financial sort hits, it can be intoxicating and disorienting. It’s called being New Money, and the symptoms are predictable.
Good judgment is often the first thing that suffers. The challenges that face New Money are legion, but by far the most dangerous is the creation of an ‘unsustainable lifestyle’.
What do I mean by that term? I mean the creation of financial obligations which can not be maintained over the long term without doing irreparable damage to a person’s net worth. Irreparable damage includes not just losing all the money you’ve recently come into. It may also mean going bankrupt, and perhaps being worse off than you were before you got rich.
How do you avoid creating an unsustainable lifestyle? First, you have to get some perspective. You’re now rich. Fine, dandy, I’m happy for you. Just know that millions of people have experienced what you’re experiencing. Millions more have watched this experience happen to others, with sadly predictable results, i.e., the less-than-pretty behavior that often accompanies financial windfalls.
So you’re not unique. You’re not special. Plenty of people have much more money than you now have, and they’ve had it much longer than you have. You may want to learn from them and listen to them before making some big, permanent mistakes.
This is not a license for you to buy everything you’ve ever wanted in order to prove a point to others or compensate for your own insecurities. This is an opportunity to be financially independent and live a richer life, if you handle it right.
How do you get it right? Go to a certified public accountant. Explain your situation. Know what tax liabilities you’ll be facing in the coming months and years. Then take about 1% of your windfall and go blow it.
What?!?! That’s right. That’s what I said. If you’ve just been handed a million bucks, take ten grand and go to town. Rent a limousine and make reservations at the fanciest restaurant in town. Buy a new pair of shoes and a new outfit. Go to Las Vegas. This is your first taste of what it means to be rich: “I can buy all this stuff!”
And 48 hours later, when you’re ten grand is gone, sit down over a cup of coffee and take stock: how was that? Do you have anything to show for that ten grand? Will you ever see that ten grand again? Can you replace it immediately, without going into your $1 million principal?
You should sober up at this point and realize how little money $1 million really is. Better keep your job. Better invest your money conservatively. Better be smart, because the odds of another million dropping in your lap in this lifetime may be slim to none. This is, you guessed it, your second taste of what it means to be rich: “Wow. This isn’t as much money as I thought it was.”
But let’s say you still go off the rails. You can’t help yourself and you keep spending. I’ll try to help you by encouraging you spend it this way, so you don’t create an unsustainable lifestyle.
First, buy clothes. You probably have limited closet space where you’re living right now, and only one body to hang them on. So there will be some inherent limits on how many clothes you can buy. Clothes can be expensive, but they don’t cost much to maintain. You may be out some cash up front, but not for the long haul. If you’re a guy and you’re going this route, I would say the essential things you must have are a new pair of expensive sunglasses and a suit that reflects light.
Second, buy jewelry. You can really rack up a tab on watches, bracelets, necklaces, and earrings, but you can always take them to a pawn shop or put them on ebay to try to get your money back when you realize you’re running out of cash. And that’s a fun experience. Still, jewelry doesn’t cost much to maintain. You just need a box to put all the stuff in that you thought you’d wear and now never do. But at first, you’ll be like the girl in this picture: just bought a lot of jewelry and determined to wear all of it at once, everywhere and at all times.
Third, you can buy a car, but this gets tricky. Cars have maintenance and repairs and insurance. And you probably won’t want to park your $135,000 baby on the street, or in a garage with other people’s cars, especially since they might park right next to yours and open the car door on it. Which means…
Fourth, you could buy a piece of real estate. This by far is the worst thing you can do before you get a sense of how this New Money is really going to change your life, if at all, and how you can most effectively manage any change. Houses require down payments (cash gone), monthly mortgage payments (cash gone), insurance (cash gone), property taxes (cash gone), maintenance and repairs (cash gone), and furnishings (cash gone).
By the time you realize you’re cash is running low from all this house stuff, you’ll be required to dump it on the market for whatever you can get, and hope you’re not upside down. You’ll be dumping all the furnishings inside it, too. Just imagine that $10,000 sofa on craigslist for 750 bucks.
But it’s up to you. You can avoid all of this heartache. You can take a vacation for ten grand (without quitting your job), let the New wear off the New Money a little bit, and simply get a handle on your new situation. You can make a list of all the things you could do with the money, and do nothing for the time being. You can talk to people who’ve had this experience before or have counseled people in your situation before. (Ask your CPA, or reach out to me.)
And six months or a year later, when $990,000 is still sitting in your bank account, you’ll have the third taste of what it’s like to be rich: “It sure is nice to have money in the bank.”
- BGT