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
… and please pay close attention to your new bombastic suit material! POLYESTER is your material of choice. Do not hesitate. Though it is strong and very durable. Do not worry about stretching or shrinking, wrinkling ……, it is resistant to most chemicals. Remember! You must shine like a disco ball!
The jewelry box deserves serious thinking! You must, are you getting me?, you must get a box that will prevent your precious jewelry from scratches. If, by any chance you will not find suitable box on the market, I will give you secret insider tip – buy miles of the finest fabric and warp your stuff to it. To make sure you getting me – RAYON is the fabric!
Hmmmmm, why would you want to buy a car that just rolled off form the assembly line? With your fortune, now you are more important, you are even cleverer than the rest of us, therefore you know these cars lose their value the second you leave the showroom. No no, you will not buy a new car with aggressive design. You will buy Hispano Suiza. These cars are old – first: since they are old, you are smarter now, remember?, it is evident that they do not need maintenance, they still run – cash saved. Second: who would want to scratch an old car? Low, almost nothing goes to insurance. Cash saved.
In terms of your house, you do not want a house like anybody else, made of wood, paper and drywall. You want a house that still will be here long after you are gone, right?! So it must be built of rocks, in Italy. Villa designed by Palladio. Villa made of stones does not require repairs and maintenance is almost nothing. Terracotta roofing shingles are made locally. Cash saved!
Oh boy, no heating costs! Cash saved, again?
And do not be bothered with Cramp-Pneumo-Arthritis, you can get nice Thai massage.
Or call Lyon Smuck and order one-way ticket to the moon.
Hi Byron. It’s a challenge everyday to turn away from consumerism, but it can be done. Again, your last line sums it up nicely. Money in the bank is peace of mind.
Thanks, Bev. Acknowledging the challenge is, perhaps, half the battle. Always appreciate your comments. – BGT
Get the excitement out of your system in order to allow patience to present the true value of a windfall.
So, basically, new money are people with no patience who never got past the excitement stage.
Now, about keeping that job. What if it’s a job that sucks the life out of you? If you’re disciplined and focused on something better would it be alright to ditch the job without fanfare?
My goodness, your posts just keep getting better, Byron. Must be all that wisdom. Thanks for sharing it.
Mary
Ah. I wish I was facing this challenge…
Very relevant post that I can relate to very much. When I made my first money I thought now the good life starts. Hey you work hard so you deserve it right? So let me buy all the expensive furniture, car(s), audio system(s) I always thought will make me happy. I mean, you have to have these toys to be happy, right?
I wish I had read TOMB 10 years ago, I would have saved some money but more importantly wouldn’t look back at myself and feel like a proper idiot. Another lesson learned…
On a side note: I think you could hand $X million to complete imbeciles and safely place a bet 90% of the wealth will have evaporated within 5 years. Getting rich is one thing. A lot of luck is involved and I am speaking from experience. Staying rich is a completely different ball game. That’s what Byron so beautifully describes in the book. My conclusion is the old money gets this lesson from early on, they soak up the mind set with their mother’s milk. Us middle class kids, well we have to learn it the hard way. Or read TOMB 🙂
I’m now a good 10 years into the “game”, I don’t think I did much better than average creating a solid investing foundation. At least we now live way below our means. Sometimes I get scared thinking this money has to last my lifetime and then also finance our kids education. Anyone who thinks “Oh if I just had $X,XXX,XXX and all my troubles would be gone”… you’re mistaken.
–One who learned his lesson (or thinks he did)
Thank you for the comment, David, and the kind words about the book. I really appreciate you sharing your first-hand experience, and I know many of the blog’s readers do, too. – BGT
Hi Dario
“The ultimate ownership of all property is in the State; individual so-called “ownership” is only by virtue of Government, i.e. law, amounting to mere user; and use must be in accordance with law, and subordinate to the necessities of the State.”
CONTRACTS PAYABLE IN GOLD, 73D CONGRESS 1st Session, DOCUMENT No. 43, 1933
Buy a money pit with borrowed “money” and you are a debt slave for the rest of your life.
Look at Hamptons, Miami, Vancouver (house prices dropped only 20% over one month).
Good luck
” … you can always take them to a pawn shop or put them on ebay to try to get your money back. That’s a fun experience.” I laughed out loud.
Regarding Mary’s question about “a job that sucks the life out of you”, I would say you don’t have to stay in a job you hate, but you have to do something. I agree with Byron that a million dollars isn’t all that much, but even if you had a lot more than that, it’s not good to just lie around all day. Achievement and accomplishment are an important part of happiness and self respect.
Thanks, Amy. – BGT
Byron and Mary, you have indicated that wealth is exciting and intoxicating. I agree. My pet theory is that the effect is similar anytime newfound wealth increases by a factor of 100 and up, regardless of the starting point. The intoxication of a millionaire finding out suddenly that he is a billionaire could be similar to that of a person in poverty winning a million dollar lottery. The only difference is that the new billionaire MAY be sobered by an upbringing that taught the rational management of wealth.
I cannot imagine unexpectedly finding $1 million dollars in my net worth statement and then blowing ten grand to “get it out of my system”. Perhaps it is because my perspective comes from being not old money, not new money nor having any prospect of winning the lottery. I have been blessed to work forty years and have managed to accumulate enough to fund my retirement and perhaps leave something to my children. Again, they will not be old money, although I hope I can leave behind some common sense values along with what they do receive. Perhaps it is because I have been sobered by the struggle, as I realize my parents struggled, that I do not believe that I would succumb. Would it be different if I won a hundred million dollar jackpot? Who knows. I’d like to think not, but it’s not hard to find news stories about lottery winners, professional athletes and other celebrities making millions and going bankrupt.
Maybe in addition to hiring that CPA, anyone finding themselves in a new money situation should ask themselves, “would I treat this blessing differently if I had spent forty years earning it?”
Thank you for your thought provoking post, Byron.
Thank you, Charles. Great question for anyone to ask themselves! – BGT
I love the attitude about preservation, work ethic and stewardship. I am a fan of your “Old Money” book but I am a bit confused. I live in an area where many old money families have been settled for a long time. I live in the north east naturally and although I aspire to be an old money family one day( or my future grandkids anyway) I am taken aback by your comments on housing. The old money I see has very expensive housing as it is a most important asset to preserve the family wealth. I assume most old money doesn’t carry a mortgage and has inherited property. Your primary residence is the only money you can both have and enjoy. Although live in a modest home, I plan on being mortgage free before retirement and may consider a more expensive residence to preserve and enjoy the family money. Is there something I’m missing? I know taxes are high here and that could be a deterrent and risky assets cannot be depended upon in my humble opinion. What should old money net worth allocation look like? money in the bank? Fully owned primary residence? Gold??? Any comments would be great. Thanks for reading and thank you Byron for another insightful posting.
Thanks, Dario, for the comment and the inquiry. Hopefully I can clarify some misconceptions about Old Money and a primary residence. First, don’t look at the houses OMG’s live in. Consider their portfolios that support the house and, more importantly, the way of life. The priority is to have an investment portfolio or multiple income streams from work and investments in order to, first, be financially independent. Then, the money earned or inherited is set aside for a child’s education. Then other money is invested wisely and dividends are earned.
As the net worth and passive income stacks up, a house is purchased. But this is, most likely, something that happens far down the line. The primary residence is usually a small percentage of Old Money’s net worth. And you’re correct to assume that the mortgage has probably been paid off long ago.
We had a big discussion recently on the blog about gold, cash on hand, and the like. I’d summarize to say that Old Money has a diverse portfolio of assets that produce a steady dividend income, increase in value over time even when adjusted for inflation, and act to preserve wealth (and minimize tax liability) over the long haul.
I’d say stocks, annuities, income-producing real estate, precious metals, partnerships or investments in brick-and-mortar businesses would be common assets found in any smart portfolio. The risk/reward ratio is always there, and each person has to decide what they’re comfortable with in that area.
My compliments to you for living in a modest home and deciding to pay it off prior to making another move. You’re on the right track, and I’m sure some other readers of the blog will be forthcoming in providing extra insight into this topic.
Thank you again. _ BGT
I think I would have said that the primary lessons of old money have less to do with the specifics of investing and more to do with how you live your life. Having said that, I think Byron’s advice is sound. I would also suggest that Dario not become too fixated on a “fully owned” or “mortgage free” house. Although it’s nice not to have to make mortgage payments, when you sell the house you will get out of it whatever equity you have in it, whether that is 100% of the sale price or something less.
Hi Dario,
although you ask Byron, please permit me to step in.
Asset is what asset does! Same with money. Money pit is not an asset. Never was and never will be. But there is one exception. I will get to that later.
You consume your house. It is your liability!!! Maintenance, taxes, mortgage installments ……… You were probably fooled, that your house is gaining nominal value in fd.rsv. notes – dollars over time and you can sell it with profit. Millions of people were fooled. There will be millions of sellers and only few buyers. There is one word Byron used to answer your question, and that word is mentioned very few times on his blog – inflation. Only few people think of it. 9 of 10 think that inflation is when prices go north. But why the prices go north, people do not care. Well, and they should.
You take a mortgage, insurance – your legal and financial obligation and liability. Bank is happy – you are their asset! They love you. If you remortgage, it is even better – for them. Do you know how much will you earn in 25 years from now? Will that be enough to pay installments? You plan family and children, right? Who do count on?
A money pit can be your asset when you rent it out to someone else. After taxes, payments, insurance……….inflation adjustment it can generate some income. You income however is not your wealth. The good news is that you can turn it into your children’s or grandchildren’s private wealth. That may give them financial/economic independence. With economic independence come social and political independence. Your grand children do not have to work due to their private wealth. So they will not get any income. But they can convert portion of their private wealth into cash when they will need it and still remain economically independent. They can work if they want, of course. But if you look around, people have to work because due to mortgages and borrowed prosperity they created unsustainable lifestyle. And now they barely go paycheck to paycheck. They already borrowed and consumed their “wealth” and made happily other wealthy. So, no more wealth for them.
Any corporation can default at any given time, without asking you as a shareholder. Bonds, treasuries…………… paper wealth will evaporate. However, the government can never bankrupt. They can “print” as much money as they need. But new kid on the block enters SDR basket and there is a threat. This requires technical analysis, years of reading ….. and I do not have time to explain things.
Wealth effect and wealth are different things. Wealth creation requires time, discipline, constant learning and reading, patience, humble self-respect, frugality, planning for people you will probably never meet (grandchildren). Creating private wealth is not that difficult. It is hard to preserve. And even harder to teach and pass certain values and way of life ( – is different than lifestyle!) to your children ……..
Try to think about wealth and how to accumulate it. Do not think about house. There are many well to do people living in apartments. They rent. You do not even notice them.
So asset is what asset does. Anything that brings money to your pocket is your asset. Anything that takes money out from your pocket is your liability.
Have you ever heard of painting going bankrupt? Can someone turn gold or silver coin into party hats?
What will you give to your first-born for the first birthday a shut up toy or a kilo of silver quarters or some stocks? What will come next? A violin, a piano, ballet, opera, foreign languages …….. I wish your children were rather privileged than rich. Byron posted excellent post about privileged children and reading. Burn the midnight oil and read them. You will get different perspective. Will you invest your most valuable asset – your time to your child/ren or will you and your wife leave your place, put your love one/s to state owned educational institution and you two will spend time with you coworkers earning income to meet your liabilities?
Your most valuable asset, except your time is your family and family member’s wellbeing and their qualities and capacity. See, all of a sudden, there is no house, car, stocks,……… but people, your people, the family.
If you now exactly when your bank will go “holyday” put your money in the bank. I am pretty sure they will show you their ledger (even if the would, you will be lost on the first page).
Why don’t you want to be your own Private Banker? Careful! Private Banker and private banker are very different things and different people. Private Banterer is ……… perhaps next time.
Keep it simple, stick with fundamentals.
Thank you for some space, Byron!
I am aware this very past due but I am new to this blog. I really enjoyed your response. It is thought provoking. I love your question….Can someone turn gold or silver coin into party hats. Uh no but you can do that with a federal reserve note.
Thank you, TRA, and welcome. Yes, my blog posts are barely half the fun here. The comments and contributors really make the place lively. Feel free to contribute. – BGT
Dario, a few years ago I have established a rule for my family portfolio that we will never allocate more than 10% of our total assets to real estate that we live in. I like having 90% of our assets invested in a diverse, liquid portfolio that produces income and capital gains over the long run. I think this is point Byron drives home in TOMB as well. Real estate we live in ourselves can be viewed as a depreciating asset that actually costs money rather than making money, it’s typically not a key building block in old money’s asset portfolios — contrary to rental property that is yielding monthly income which is a completely different animal.
I would recommend to be careful as to think of your self-used residence as an investment, although this might seem like common sense. Maybe this is where many middle class (like my parents) go wrong thinking that their primary residence is the most important investment of their lifetime. Yes, you save paying a monthly rent, but you’re expose yourself to transaction costs, bind capital and over time spend a lot of money on maintenance, renovations, property tax and insurance. I’m not even getting into the energy spent on dealing with contractors and paperwork for maintenance and renovations. Personally, in my family investing spreadsheets I assume a total real return (after inflation) on our private residences of -1% annually. Just to be conservative I assume we’re actually going to lose money owning our houses. In a sense it’s a luxury to own a nice house, designing it to your personal liking and living in it. By living in it, we use it and wear it down and over the long term it depreciates in inflation-adjusted terms and needs maintenance.
The funny thing I found is if I ask friends if their think of their newly bought SUV/sports car as an investment: “No that’s just for fun. I know I lose money on it”. Then when asked about their McMansion: “Oh wait, now that’s an amazing investment, we practically live in it for free and down the line we’ll sell it for a nice profit”. I think this topic is one where many people blindly accept conventional wisdom without questioning it.
Hi David! You make some good points. Most of the research that has been done lately suggests that, over the long run, using dollar cost averaging to invest in broad based index funds yields better returns than residential real estate, and certainly using a primary residence as an investment vehicle has fallen out of favor since the 2008/2009 subprime mortgage crisis. But there are a couple of other factors that should be considered.
First, a mortgage is an excellent form of forced savings. You have to make that mortgage payment every month, and every time you do, you’re building equity in your house. This can be very good for people who have trouble saving. Second, you have to live somewhere. You can’t live in a stock portfolio, but you can live in a house. Living in a nice house in a nice neighborhood while you build equity can significantly improve your quality of life.
Not everybody needs help saving and some people care more than others about where they live, but these are factors that sometimes get overlooked in the debate over return on investment. But for all that, I’m like you; we have a lot more money in stocks and bonds than we do in our house and we too are mortgage free. My point is that the reason there’s a debate about this is that there is a lot to be said for both sides. Put simply, it’s complicated.
Thanks all for the insightful comments. Although personal finance is personal, it is refreshing to hear perspectives that other people have to avoid long term consequences of improper financial planning. I used to prepay my mortgage and lately I have been more cash strapped and feel better with capital outside my primary residence. I know that investment income can liberate a person in so many ways but can’t the same be said for a person without a mortgage? With no mortgage you can travel more, live it up a little more, send kids to a better college. Isn’t that old money style?
I’m glad you’ve benefited from everyone’s input. And thanks to everyone who commented. Yes, getting the children into a good school is critical. Thank you, Dario. – BGT
Good comment, David. 10% on the residence seems like a solid rule of thumb. And some of your friends sound just like some of mine! – BGT
Don’t forget the tax savings on a mortgage. It might not be a total loss if you put the money in investments instead of actually eliminating the mortgage.
Amy and a Charles, you both make good points.
$1 million is nothing to sneeze at, but it isn’t enough to stop working.
I’m referring to enough money to stop working or that provides the rare opportunity of taking a time out to find a better career fit.
I lived in a southern city filled with a fair share of very wealthy families and those women do not play around when it came to their charities! They approach them as if they were full time jobs and members are expected to be completely committed to them. They help many people and contribute to cultural life. So, Amy, you’re right, it is important to contribute and be productive.
Charles, maybe age has a lot to do with it. I just can’t imagine the average 20-40 year old not wanting to wild it a bit. That’s not unreasonable. Mature older folks probably reach the “it sure is good to have money in the bank” stage without needing to fuel a fantasy or two. Either way works. Plus, the younger person has time to recoup that 1% if he/she plays his/her cards right.
Philippa, my father always said that if you don’t know how to handle $10 then you won’t be able to manage $1 million either. Manage your present finances well, and that will allow you to experience some peace of mind.
After resisting the temptation to spend recklessly, the next challenge would be handling all the woodwork dwellers’ requests .
I came into just a few thousand and some family members’ reactions caught me by surprise. If I ever come into another windfall only my husband and management team would know about it. If it were substantial enough, I’d figure who to help, how best to do it, and how to ignore everyone else.
Great comment, Mary. On target. Thank you! – BGT
Mary, I love your term “woodwork dwellers.” Made me laugh. I have some of those myself, and I had the very same reactions. Money does strange things to people, and that’s why I love Byron’s blog and books so much. His advice is sound and makes complete sense to me. I’ve learned a lot from him. Thank you again, Byron!
Hi Amy,
all you own are promises to be paid in fdrl. rsv. notes, not money.
Would you mined sharing links to those, let say 5, recent researches, or sharing their titles, at least, please? I do not mind paying for them.
Hi Byron,
Take $50 dollar American eagle coin, multiple 20.000 times. It should be 1 million dollars.
Or take $50 dollar American buffalo coin, multiple 20.000 times. It should also give you 1 million dollars.
Take 1 million in Federal Reserve dollar (promissory) notes and compare it 20.000 troy ounces of gold – money.
It is enough for two!
As I stated somewhere else, European OM are much different and older than American OM.
They do not teach this in “better” colleges. One studies at home. OM do not need organized schooling, OM have common sense, stoicism and pragmatism for hundreds of years. OM do not count on research. OM do not need career and diplomas.
Good comment. There are differences between American and European Old Money families. Thanks! – BGT
This maybe the best summation of what I’ve learned from your book, Byron. A brand new Fender guitar for a few thousand dollars, in truth, makes you feel worse when you realize you are no Hendrix. (Tip: The $100 Mexican-made version collects dust in the corner just as good as the $2,000 USA-made version) But ladling soup at a soup kitchen does give you a pretty good feeling inside. And the non-wasted money in the bank feeling, pretty nice as well.
I’ve never played the guitar, but I have heard similar dismay expressed when a player realizes he’ll never be a Hendrix. I did have a laugh a few years ago when some session musicians were unexpectedly joined by Eddie Van Halen. He did a solo, then nodded to the player next to him to follow. Then to the one after him. Then the one after him. For some reason, nobody wanted to follow a solo by Eddie Van Halen. Eddie himself couldn’t understand it. After the jam session, he lamented, “Dude, we’re all just playing the guitar!” Good for you on your choices, GMD. – BGT