Or $10 million?
Sure, the probability of this happening is not high. But that’s not the point. The point is that most people aren’t exceedingly wealthy. But when you do become wealthy, will you be prepared to handle your finances?
People without money worry about money. People with money worry about money even more. You’d be surprised, but when you have wealth, you take on a whole new set of issues that you didn’t have when you were poorer.
People often assume that happiness comes with wealth. Now, there’s probably truth in the idea that most people would rather be unhappy with money than unhappy without it. But the wealthiest people in the world are not always the happiest.
Studies have shown time and again that the wealthier you get, the less generous you are, the more isolated you feel and the more your social connections deteriorate.
These issues can cause a serious decline in your quality of life. So if you are wealthy, pay attention and reconnect with what made you happy before you were wealthy. And if you’re not, take this opportunity to prepare for that day when you are!
I’m not a psychologist, and I don’t play one on TV either – but I can share what you should and shouldn’t do if you accumulate wealth.
People who don’t have money often think that a windfall will solve their problems. This can be true, but only if the windfall is dealt with correctly.
Instead, often, people who have never had a lot of money often fall into the spending trap immediately. It’s the age-old lotto winner story: Nearly 70% of lottery winners end up broke after seven years.
This happens because they have no discipline. It’s true that people who have little money tend to be more disciplined by necessity, but sudden increases in wealth can distort your perspective.
Here are my rules for how to deal with that windfall. It doesn’t matter whether it’s $1 million or $5 million.
- Pay yourself first. Just like you should prioritize saving with each paycheck, you should send a big chunk of your windfall directly into investments. If you’re looking for income, then your investments should be slanted toward laddering bonds or CDs. If you’re looking for growth, look to dividend-paying stocks.
- Pay off your debts. I don’t care if the debt is low interest or high interest. Debt is debt. Paying yourself that money every month instead of paying it to your bank or lender is a great feeling, and it will allow you to increase your wealth substantially.
- Then, treat yourself to something nice. If your idea of “something nice” before you were wealthy was to spend money on a one-week vacation, then do the same – just pick a nicer hotel and maybe indulge in fancier meals. If you change your expectations exponentially, you will spend exponentially more. Money should make your life more comfortable, but it should not change your personality.
- Set aside some cash to give to family members. Do not loan them money – you’ll never get it back. (At least, you should assume that this will be the case.)
- Keep at least one year’s worth of expenses in a money market account.
- If you have cash left over after completing all of the above steps, then go back to the first step and start over.
It is critical that your initial spending will increase your financial security, not blow it up in smoke. For example, buy a better used car if yours is not reliable. If you can’t get to work, you can’t make money!
It’s these types of expenditures that are most important in the end. Taking care of your health, for example, should be paramount. At the end of the day, if you’re not around or are too sick to finally enjoy your wealth, what’s the point?