Moneywise24 Personal Finance

Every now and then I have been thinking what I would do if I would win a few million in a lottery, or in the casino. I am sure most people have, perhaps you have. I have been discussing all possible scenarios with my friends, and often we ended up talking about expensive sports cars, yachts, luxurious estates and world travel. Honestly, if this is really how I would spend my millions, I would probably be instantly in debt.

I watched a documentary the other week, in which they were looking at what people had done with the millions they had won in a lottery, and as it became obvious, most people had spent their money very stupidly. A psychologist was asked about this phenomenon, and he claimed that it is only logical; these lottery winners were not at all used to thinking in dimensions of millions. They were literally thrown out of their own reality, which caused them to make irrational decisions.  This particular documentary set me to think: how would I handle that much money.

Keep my job

Okay, I have to admit, it really depends how much I won. But at least at first, I would definitely keep my job. Especially if I can not live off interest and maintain a good standard, what is the point in quitting my job? Besides that, I love my work. I might quit at a later time, but first I want to see how things are developing.

Cash Savings

Before I would do anything with the money, I would put some part of it on a savings account. Call it an emergency account if you want to, the money is intended for emergency situations, and in case I would lose everything. This money should allow me to start all over again just in case things go wrong. I would probably put aside about two years of my current salary.

Real Estate

Currently, I am renting an apartment, this might be one of the first things I want to get rid of. I would probably buy something bigger and more central than what I have now, but I do not see the point in buying a luxurious estate, which would vaporize most part of my money. A nice 2- or 3-bedroom condo in the city center will do, nicely furnished, a place where I feel good and comfortable. Besides, I am conscious of the fact that the bigger and more luxurious the estate, the more tax and other yearly expenses I will have. Real estate offers me the benefit of lowering my monthly expenses (my monthly rent) while making a long-term investment. Alternatively, I might purchase more than only one object, which I would rent out if I am not using them. This way, the incoming rent will compensate for my expenses I have on the real estate, and I am investing money with a long-term focus.

Long-term investments

At least half of my winnings, if not more, I will invest long-term on the stock markets. Firstly, I want my money to grow over time and it to gain value. Secondly, I want to obtain dividend payouts. If these dividends are high enough, they could even substitute for my current job, either partially or completely. But until I have reached a certain threshold, I would keep my job.

Business

If I feel entrepreneurial, I would perhaps start a business. However, I will do this with great caution. I do not have great experience with running businesses, so I will start small, even though I have the necessary funds to start big. By gaining experience, I can build my business from there, and engage into bigger businesses over time. The documentary I was writing about earlier showed a man, who invested most of his money in a bigger type of manufacturing business, which went bankrupt due to his inability to run that business. By the way, the guy ended up broke, and his wife left him. So did many of his friends.

Education

I am a fan of life-long learning, whether it is a new language, an MBA, or something else which I find interesting. I consider education an important part of my personal development.

Something needs to be spent, right?

Good, I have to admit; of course I will spend some of that money. I might buy some fashion, perhaps travel the world, buy a more fancy car, or take my flying license. I will definitely give myself some treats, but I will do this in a dimension I understand. I would hardly start to buy business suits worth 5,000 Dollars, as this is a dimension of spending I am not familiar with, and which I do not need either. The same goes for my world travel: I might fly business class on long distance flights, but I don’t see the use of paying 8,000 Dollars or so for flying first.

I am in charge of my money

I recognize the fact, that once I win the lottery I will probably be approached by many so-called consultants, who would recommend me to invest my money here or there. But I will, at all cost, remain fully in charge of my own money. I might consult someone I really trust, who may give me advice of specific trends and market developments, while at the same time I make my own decisions.

Honestly, I have never been in a situation of winning millions. However, I believe that becoming suddenly rich can be quite problematic for many people. And even if I am gaining wealth slowly over time, I will cherish the above points, in search for long-term growth, development, and a stress-free life.

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I was thinking a few things over last night, amont others how my financial situation would look if everything crashed: stocks plummet and I would lose my job due to a financial crisis. In my case, this wouldn’t look good at all.

Currently I keep 3 different bank accounts:

• a checking account, where my employer transfers my monthly income, and which I use for day-to-day expenses.
• a short-term savings account, which I use to park money which I do not need immediately. I use this money for clothes, a new computer, furniture, etc.
• an investment account, which I use to buy shares and make other long-term investments.

I figured, one thing is missing. What happens when I would lose my job, and my investments would plummet? Or if my house is burnt down and I need money immediately in order to start up again with having nothing? It came to me, that having an emergency account is actually of great importance. For me, an emergency account would ideally be an account which has virtually no risk of the money being lost. Probably, the best solution is a savings account, with a potentially low interest, where the money is ‘parked’, but always readily available, for situations when I would need money fast.

The Bank

Different banks have different policies. We may assume, that each bank will invest our money and our savings into some form of investment, share, or fund, and in exchange we receive an interest. My biggest concern when selecting a bank, is the amount which I am guaranteed to have when things go heavily wrong with the economy. We have probably all heard about the Iceland banks and its account holders, who lost all its money since the bank did not have enough reserves available when shares plummeted with the financial crisis in 2008. Myself, I am Dutch, and I know that my bank guarantees reserves of at least 25,000 Euros per account holder; the governement is thinking about raising this amount to 100,000 by law. Surely for those having some million Euros on their bank accounts, it poses a great risk. But for my purposes, it will definitely do.

Availability

The second criteria is that my money is always readily available when I need it. Firstly, this means that the account type itself is not locked for a specific number of years, and I am allowed to transfer money from that account to my checking account when necessary. Second, it means that the bank should have an online banking system available, which operates in real-time, and that transfers are conducted immediately. I currently have accounts at two different banks; one of them, for example, would withdraw the transfer amount from my account but keep it for a couple of days before transfering it where I want it. This means that the money which I might need in an emergency situation is not available for a few days; not good.

Interest

I do not want my money to sit around without any interest being paid. Since I will not be investing this money anywhere, I will look at the best interest deals available, within the frame of the two previous points mentioned. As such, my money can grow over time.

Amount

The amount, which should sit on the account, should be enough to either be able to live off it for a period of 6 month in case I have no income, or it should be enough to build a new existence from nothing. The exact amount, which someone needs should be determined on a case-by-case basis, but below is the calculation I made for myself:

• My monthly living expenses are approximately 1,200 Euros per month. These are only necessary expenses, which I will have in any case, and does not include clothing, excursions, or anything which I do not need to get by. 1,200 Euros over a period of 6 months is 7,200 Euros.
• Looking at the 7,200 Euros above, this is also quite sufficient to build up something new; initial costs for renting a new apartments, costs for moving existing furniture to the new place, or buying new furniture.

The biggest trick, ofcourse, is not to touch this money whatever happens. If I do not badly need it, it should simply rest on my account. Should I not have needed the money until my retirement, I can then use it as a small retirement bonus.

By the way: if I leave this 7,200 Euros sit on the account for 30 years at an annual interest rate of 3.0%, it will be worth 17,476 Euros by the time I retire; that is a really nice trip around the world.

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