Dear Money & Crisis Reader,
If you like a good horror story… buy a financial adviser a beer sometime.
I’ve heard some terrifying tales of woe from these guys over the years.
But the one I heard the other night takes the cake…
I was grabbing a few cold ones with an old friend of mine.
He’s a great financial planner. But if you get a few beers in him, the guy turns into an even better storyteller.
Full disclosure: My buddy — we’ll call him John — takes his privacy and the privacy of his clients very seriously. As such, all the names in this story have been changed.
Money for Nothing
So it was 2009. And a young woman — let’s call her Susan — walked into his office.
In those days, the entire country was in the midst of what we now call the Great Recession.
But for Susan, things were starting to look up.
A distant relative, one she’d never even met, had died… and left her somewhere in the region of $500,000.
It’s the kind of situation we all daydream of.
The problem was, Susan had never dealt with such a large sum of money before.
John offered to take her on as a client… but she wasn’t looking to hire anyone.
So he put together a financial plan to guide her… and never expected to see her again.
But four years later that same woman walked through his door.
“What had happened to the money?” he asked.
It was gone.
Had she followed his advice?
Of course not.
Then why was she here?
As it turns out, our friend Susan had just come into a bit of money again. This time it was somewhere in the region of $250,000.
Well, John gave her almost the exact same advice he’d given her four years ago and sent her on her way.
Normally, that would have been the end of the story. But after what happened last time, he was curious to see if she could stick to the plan.
He reached out to her a couple of years later to see how she was getting on and…
She lost it all again!
“The moral of the story,” John says, “is you can give a horse a step-by-step financial plan… but some horses are just no good with money.”
Managing a Windfall
Now, I don’t exactly know how Susan spent all $750,000… but I can take an educated guess.
Most windfall recipients — like lotto winners, for example — make an all-too-common mistake when it comes to managing their money.
They overestimate just how much money they actually have.
Yes, $750,000 is a nice chunk of change. But how long can you live off it? Maybe 10 or so years, depending on your lifestyle.
That is, if you don’t blow it all on buying fast cars, big houses and the newest, most expensive version of everything.
That’s what most people do when they get their hands on large, lump sum of cash. Pretend they’re celebrities.
Which is why 70% of lotto winners end up flat broke within five years of their big win.
But it doesn’t always have to be that way.
A windfall of this nature is an incredible opportunity.
You can use it to make yourself more comfortable and protect yourself from financial crisis at the same time… if you know how.
Read on for my top three tips for managing a cash windfall the right way.
Pro Tip #1: Supercharge your emergency fund
Your emergency fund is the last line of defense in a financial crisis.
If you lose your income in a crisis, you’ll need this store of money to pay the bills, feed your family and protect yourself from financial ruin.
I usually recommend an emergency fund of three-six months’ income. But with a large windfall, you could easily pad that to a year or more.
Pro Tip #2: Splurge… on debt
Instead of splurging on ritzy vacation homes and talking refrigerators, use your windfall to free yourself from the shackles of debt.
Start by paying off your high-interest debts like personal loans or credit cards before moving on to low-interest debt.
This will save you a fortune in the long run and drastically increase your monthly disposable income.
Pro Tip #3: Buy physical silver and gold
How do you invest your wealth when the next big financial crisis could be around the corner?
A store of physical silver and gold can’t be wiped out by a computer error. Not to mention it will increase in value as precious metals are in higher demand. And it’s perfect for trading in a disaster scenario when your cash and credit in the bank might be unavailable.
For more information on buying silver and gold, check out yesterday’s guest essay from Jim Rickards, best-selling author of Currency Wars.
As always, we welcome feedback from our readers. If you agree, disagree or have any financial horror stories of your own, you can email me right here.
All the best,
Editor, Money & Crisis