For anyone unprepared, a large unexpected windfall can lead to financial ruins. Arm yourself with the right knowledge and enjoy financial well-being with or without a windfall.
I wrote this article in the hope it will inspire people to learn the safe way to invest in the stock market via funds, and not let the lack of investment knowledge be the start of money troubles after you come into any kind of windfall.
I was inspired by a sad story about someone I know, who burned through approximately $250k USD of inheritance in less than 7 years.
To protect privacy, I will call this person Sam. Sam is retired, and it really saddens me that he managed to blow away so much money so quickly, and is now pretty much penniless. Relying on a tiny pension topped up with state pension to survive.
What happened? Sam came from a poor family background and had only ever been to school for a few months in his childhood. That didn’t stop him though, he worked hard throughout his life and was careful with money.
A few years ago, Sam came to a sizeable inheritance, worth around USD 250k. That turned out to be one of the worst things to happen for him financially. Sam never had so much money before, and simply didn’t have the tools to manage it, or the mindset to seek advice. The only thing he knew about were bank accounts, so he put some of the money into fixed-term deposit accounts, paying the usual poor interest rates.
With the rest of the money that isn’t locked in fixed-term accounts, he began to treat himself to a luxury lifestyle that he never had: expensive holidays, designer goods, expensive foods, all of which were enough of a drain on his bank balance.
Worst of all, as a retiree with nothing much to occupy his time, he took to gambling to past his time. Within a couple of years, he had joined every casino within a 5-mile radius. He visited at least once daily, sometimes twice or more. He would go there to meet up with friends, chat, and play some slot machines. It was now a matter of time before he would gamble his small fortune away. Any attempts to persuade him to stop were met with a “what am I supposed to do with my time” type answer.
At one point he had no money for food but borrowed enough to go back to gamble. Then celebrated when he came out $2k up. The truth is he is probably closer to $150k down.
Unfortunately, stories of people burning through a fortune are more common than it needs to be. Stories of lottery winners going broke just a few years after winning. Ending up with less money than what they started with.
A million dollars sounds like a lot, it is certainly out of reach for most people who don’t have a proper strategy to accumulate it. Having said that, a million isn’t as much as it once was. A large house in a good area can cost more than that easily, add a couple of fancy cars, and you won’t get much change from a lottery win. So if someone won a million, or two, and think they can start living a millionaire’s lifestyle, then chances are they will burn through the winnings in a handful or so years. Because unlike a millionaire who earned their fortune, a lottery winner doesn’t have the means to top up the bank balance to match the rate it’s being spent.
Quite scary when you consider how hard it is to save a million for a typical employee. Someone earning an average salary is unlikely to be able to save a million in a lifetime by simply putting money away in a bank account, not even if it’s a tax-free bank account. Not even if they were lucky enough to get “market beating” 2% or 3% interest a year.
When someone with no idea how to manage money gets a windfall of cash, it could be the worst thing for them in the long term. Perhaps regulations should be introduced to ensure everyone coming to large sums of money are given the necessary training the money is released.
With money comes freedom, the freedom to be reckless, or the freedom to be responsible. Money is powerful and magical, but only with the proper know-how to harness that power. Without knowledge, it will magically disappear as quickly as it comes.
It’s ironic that schools across the world are competing to nurture the best brains in sciences, in the arts, and everything in between. They pride themselves in creating productive citizens of the future, yet they fail to prepare students in a single subject that will affect every single one of them for the rest of their lives — how to handle money.
Most people leave full-time education without the most basic knowledge of accumulating wealth. Subsequently, they miss out on the most important first few years to any investor’s life. The difference between investing for 40 years versus 45 years at an average 7% growth is 44%. Someone starting investing at 27, could be worth 30% less than someone who started at 22 by the time they reach 67. The difference is even higher if the rate of growth is higher for any period of time.
Future value of investing $100 each month over the years: 44% difference between 40 and 45 years.