How Well Do You Manage Money?

If you received a large cash prize today in the U.S., how well would you manage it? Say you win $10 million on a game show or raffle. How can the money best be managed?

Another post on this website, “Why Nobody Can Manage Money,” is based on the premise that there is no right or wrong way to spend money, since everyone comes from different walks of life and therefore have unique perspectives.

This post, on the other hand, is based on the conventional wisdom that some financial decisions are in fact better than others. Certain types of financial choices and people will be rated based on sharpness, starting with the lowest.

Without further to do…

Certain types of people, with minds as bright as the bottom of the seabed, gamble all the winnings away quickly. Straight to the sewer the money goes, only to be lost in the dark and never enjoyed. What’s worse? The taxes that the nincompoops owe. Game shows typically withhold 24 to 30% of the earnings they disperse. If the show withholds 24% of the $10,000,000 and you must pay 37% in taxes, that’s 13% you must still give back when you file your taxes – in other words, $1.3 million. With the slipped out of their impulsive palms, where will the greedy gamblers come up with the money to pay the IRS? Penalty time!

Unlike the people mentioned in the E category above, these people manage to hold on to the money for about three to five years, which is still not praiseworthy. Splurge, splurge, splurge is the name of the game for these folks. You hear this all the time. Supercars, yachts, mansions, purses, and clothes. The merry-go-round lasts for infinity…until it doesn’t. Poof. Time has zipped by faster than a terrified zebra running frantically from a few lionesses. They must change their last names from Jones back to their original surnames. No longer will they be able to impress the figments of their imaginations. Gone are the days they will be able to pretend to have wealth. They must now face the emptiness of their lives.

Don’t misinterpret this. You should want to have fun. Fun is GOOD! With millions in the bank, only a peanut-brained person pinches pennies at the expense of upgrading his life. Scrooge the fool lays on his deathbed wishing he wasn’t sour during his single life.

However, there are smart ways to have fun as well as dumb ways to have fun.

After encountering millions of dollars, some people pay off any debts – credit card debt, mortgages, student loans – they have promptly. They then keep the rest of the winnings in a checking or savings account. Such people either quit their jobs and live off the cash, or continue to work and use the money for emergencies. This is fine, except for the devaluation of the money. Don’t forget that inflation exists. Sure, you are free to never work again and live off of $100,000/year for six decades; but with an inflation rate of 3.0%, the purchasing power of that money is halved about every 22 years. Enter the following into the Google search engine: 0.97^x = 0.5. Let the A.I. perform the math for you. The variable x ≈ 22.

In 22 years, that $100,000 will be worth what $50,000 is today; in 44 years, $25,000. Of course, as stated, you can place the money in a savings account and continue to work, but the average annual percentage yield (APY) is a minuscule 0.41%. Also, why trust a single corporation – the bank, that is – with your money? Security breaches happen all the time, never mind that only a quarter million is ensured by a standard bank.

Let’s assume you live in a state that collects no income or prize taxes. That leaves $6.3 million in your bank account. This money can be invested in the stock market. For an average annual return rate of 5%, $6.3 million generates $315,000 per year. Unqualified dividends are taxed as income; qualified dividends, capital gains. The amount of money you must give back when you file your taxes will likely range from 15 to 35%. At minimum, you’ll net $204,750 per year, which is over $17,000/month. As you are probably aware, that’s more money than most people make from their jobs.

If the money is invested wisely, you will never have to work again to cover basic necessities – food, water, shelter, clothes. That said, having so much free time after being acclimated to working for years will drive many people nuts. So what can you do? Perhaps find a passion or dedicate yourself to a cause. Gain skills on the way, so that you become the caliber of person that can make money without relying on luck.

For investments, when financial professionals talk about “diversifying your portfolio,” they mean “don’t put your eggs in one basket.” Imagine you placed the entire $6.3 million into Dell Technologies Inc. If the technology corporation goes bankrupt, then your money will decrease rapidly until it disappears. When you invest money in a company’s stock, you buy portions of the company called shares. You become one of the company’s shareholders. The more the company grows, the more each share is worth. The more it shrinks, the less each share is worth.

Say Company A is worth $1 billion and each share is worth $100. You buy 5,000 shares for $500,000. Within a year, the company manages to double its net worth to $2 billion. Your $500,000 principal is now $1,000,000, since each share is now worth $200. How much in dividends will you receive? That depends entirely on each individual company. Some, like Wal-Mart, give out less than 1% per year; others, over 5%.

Money can also be invested in bonds, properties, and mutual funds. When you buy a bond, you are using your money to help an organization raise capital or pay off a loan; in return, you typically receive a paycheck semiannually. Properties are houses and storage units that you can rent out to tenants or customers. Mutual funds are similar to stocks but more diverse.

Many prize winners would distribute money into poor investments. A “poor investment” is one that is not well thought out. If you invest with the intention of trading, then be sure that the value of the shares will increase. Research and understand markets thoroughly before giving up your money. If you keep incurring losses, then you’ll run out of money eventually.

Several people often pick startups with no durable track record. Alternatively, they may loan their parasitic friends or family members money after being sold half-baked business ideas. People who “invest” like this are effectively not much different from those described under the D rating. Shining object syndrome and quick money schemes are mind viruses to avoid.

Those who are excellent at money management can turn millions of dollars into billions. These are the people with a keen eye for opportunities. Most of these people have already built businesses from scratch. A competent businessman earns his keep by producing goods that people want. An exceptional businessman becomes wealthy by giving people what they didn’t know they desired. You must be actively on the lookout for ideas that will revolutionize the market, along with the broader society. You must also implement such ideas well.

Is this easy? No. Only the most creative minds, courageous hearts, fiery bellies, and iron wills will initiate, plan, and execute innovative ideas.

Many businesses fail because many people are dumb. Likewise, many businesses never get started because many people lack guts. People who can multiply money by magnitudes are cut from the highest quality cloth. They are wired differently, bestowed by the gods to push society forward, and are rewarded rightfully for their contributions.

At the billionaire level of wealth, it is common for individuals hire lawyers to help them find loopholes to lower the amount of taxes they need to pay the IRS.

Only an imbecile would waste millions of dollars on gambling and drugs. Short-term status peacockers allow their narcissism to carry them away, letting their money slip from their fingertips slowly but surely. Salt-of-the-earth, prudent people store their money in the bank. Patient risk-takers willing to carry out a bit of research allocate multi-million-dollar prizes to stocks and bonds.

None of these four types of people are outstanding. The impressive people are the ones who, again, can generate billions of dollars from millions. They are the movers and shakers of the world.

Managing money, in it of itself, is a skill. People who manage money poorly will never be wealthy. The likelihood of you gaining money through luck alone is slim to none. If you want to make more money, you need skills and services that are valuable to the market. You need to also be able to sell yourself well as if you are a product.