A podcast listener asks:
Let’s say you win $100,000. What are you doing with that money today? You have a house that’s not paid off yet, no student loan debt, a 401k plan and a solid investment portfolio.
This is a very specific amount of money but you could pick any number here and it doesn’t matter. What matters is your framework for dealing with a lump sum of money.
It could be an inheritance, a bonus, variable income, a winning lottery ticket, a successful investment, a side income, that kind of thing.
I like to think about this in the same way an investor approaches asset allocation.
If you have a pre-set asset allocation in place you don’t have to think about where to put your money when it’s time to invest. You simply invest your capital in proportion to your pre-selected allocation weights.
That’s the beauty of having an investment plan — you make good decisions ahead of time so you don’t get paralyzed when it’s time to make a move.
The difference when dealing with a lump sum that has no job attached to it is you’re now making a savings allocation decision.
Your savings allocation could include, but is not limited to, the following:
- Debt repayment
- Short-to-intermediate-term savings (travel, house down payment, a wedding, etc.)
- Taxable long-term investments
- Tax-deferred retirement savings
- Giving to those in need
I’m sure there are some financial obligations I missed here but you get the point. The idea with a savings allocation is to have some general sense of how to allocation any variable or one-time income or money that comes in.
For example, every time you earn a bonus or unexpected side hustle income or the like you could allocate that money something like this:
- Debt repayment (15%)
- ST savings (20%)
- Vacations (10%)
- Charitable giving (5%)
- Roth IRA (15%)
- Brokerage account (10%)
- Whatever you want (25%)
Just like your asset allocation, your savings allocation weights depend on your circumstances, needs, and financial position.
That last line item is an important one, especially for those who take their finances too seriously. It’s important to give yourself permission to splurge every once and a while.
Setting aside whatever money gives you the ability to let loose with your spending without compromising the rest of your finances.
Buy a bunch of clothes or shoes you wouldn’t normally buy. Pay for a round of drinks for your friends at the bar. Go to a concert or comedy show. Go golfing at an expensive course you don’t frequent. Take a spa day for yourself.
And if you’re conscious of the fact that this money serves a purpose as a release valve within your finances, you don’t have to feel bad about “wasting” it. As long as you’re already saving money elsewhere for other goals, it’s fine to go nuts with a portion of your money on occasion.
Otherwise, what’s the point of saving in the first place?
So if I got a hundred grand today (maybe from a hot streak with my new online sports gambling
addiction hobby) I would certainly make some boring savings decisions with that money.
But I would also make an effort to buy some stuff or experiences don’t normally buy.
Michael and I discussed what we would do with a hundred grand and much more on this week’s Animal Spirits video:
Subscribe to The Compound for more of these videos.
Living Paycheck-to-Paycheck on $100k a Year
Now here’s what I’ve been reading lately: