Wealth Decision #6- Be Frugal With Windfalls

Wealth Decisions Podcast Transcript for Wealth Decision #6- Be Frugal With Windfalls

Listen to this episode on Apple Podcasts or Spotify

You know, it's been said that if you divided up all the wealth in the world equally amongst everyone, it would all end up in the hands of the people that were wealthy to begin with.

Not because they are smarter or more educated, it's because they have a wealthy mindset, and they know how to manage their wealth, and they wanna get it back, because they liked that feeling.

I truly believe that wealth is a mindset.

In today's episode, we're gonna be discussing wealth decision number six.

Be frugal with windfalls.

Now, this wealth decision applies to any type of windfall that you may get in your life.

That could be an inheritance, a large bonus, or if you're in sales or you're a realtor, a large commission check on its way.

You know, most individuals who don't have a building wealth mindset have that potential inheritance or bonus check or big commission check usually spent before they even receive it.

I always say jokingly, don't be a grasshopper.

Grasshoppers don't plan for the future.

Invest your windfall instead of spending it.

What I'm going to be talking about in this episode is some strategies and some mindset shifts to make sure that you do the right thing if you ever come across any type of windfall in your life.

Using the Rule of 72 as a guide, which shows you how many years it takes your money to double, think of every windfall you get as what the potential value could be 15 years from now.

So for instance, if you could achieve a 10% rate of return, divide 10 by 72, which equals 7.2 years.

So if you get a bonus of 25,000, that bonus is worth about 100,000 15 years from now, using the Rule of 72.

Because every 7.2 years at a 10% average rate of return, your money is going to double.

So that $25,000 bonus 7.2 years from now is going to be worth 50.

And 7.2 years after that, which would be right around the 15 year mark, it would double from 50 to 100.

So think of every windfall as a sum of money worth 4 times its value.

And if you look out even longer, say for instance 30 years, think of any windfall as a sum of money worth 16 times its value, using the Rule of 72 as a guide.

We all know the power of compounding.

I think most of us know the answer to this riddle.

There was an old question that asked a simple thing.

If you could take a penny and double it every day over 30 days, and you ask the normal person, would you rather have 2 million dollars today or a penny doubled every 30 days?

It's a tricky question because doubling a penny doesn't seem like it would really amount to much.

But at the end of 30 days, that penny doubled every day for 30 days would be worth over 5.3 million dollars.

Albert Einstein often said, compound interest is the eighth wonder of the world.

He who understands it, earns it.

He who doesn't, pays it.

Over the next 15 to 25 years, there is going to be trillions of dollars going from one generation to another.

So this episode will focus a little bit more on inheritance, but you can apply this same philosophy, like I mentioned earlier in the podcast, about a big bonus you're getting or a big commission check.

Inheriting a significant sum of money can be a life-changing event, but it's important to approach that with a frugal mindset to ensure long-term success.

The statistics show that it takes people who inherit money about 18 months to spend it all.

I don't want any of you listening to this podcast to be a statistic.

Before making any hasty decisions, take the time to reflect on this new found wealth.

I run clients through a three-step process when it comes to inheriting money or investing a big lump sum from a bonus or a large commission check.

There's three steps.

It starts with assessing how long it would take you to save the amount of money that you're inheriting.

So for instance, if you're inheriting $500,000, how long would it take you to save that amount of money?

Let's say you could put away an extra $2,000 per month.

It would take you about 20 years to save $500,000 in a taxable investment account.

The next question I ask is, forget about the inheritance for a second.

If you saved $2,000 per month in a taxable investment account and accumulated $500,000, would you still spend the money the same way as the windfall that you're about to inherit?

If instead of spending that $500,000, you invested that sum of money, assuming an 8% rate of return over 20 years, you could accumulate over $2.6 million.

Now that is life changing.

If you're going to be inheriting a specific amount of money, maybe you're in that position right now where there is some type of windfall coming your way.

There is a great calculator on my website under the Tools tab.

It's the Future Value Calculator.

You can put in the amount that you may be inheriting using an 8% rate of return, and it will show you what it would be worth in whatever time period you want to look at, whether it's 10, 15, 20 years.

So we have the opportunity to change your future wealth picture for you and your family if an inheritance or some type of windfall comes into play.

One little tip when it comes to bonuses.

A lot of salespeople or people in roles where you're bonused on top of your salary.

Think about upping your 401k contribution rate when you get a bonus, because bonuses are taxed at a much, much higher rate than your normal income, because they assume that you earn that every single month.

So if you have a bonus coming, have a big chunk of that bonus go into your 401k to max your 401k out for the year.

The second step that I run clients through is to look at what that potential windfall could do for them now, not just looking about what it could be worth 10, 15, 20 years from now.

Let's say you inherit $500,000.

You can invest that in a nice balanced portfolio of dividend producing investments and create roughly about a 3% income from that particular investment.

So instead of spending any of the amount that you inherit, look at keeping the principle intact and taking the income to use for home improvements or for that next trip to Greece or to pay off some debt, whatever that is.

That income that you could create from a $500,000 portfolio would be $15,000 per year.

So allot $15,000 for that year towards a home improvement project or towards a couple trips and keeping that money growing for you and working for you rather than touching any of the principle.

And the third step in the process that I run clients through is to visualize different scenarios of spending the inheritance versus investing.

I'm all about living for today and if there is a home improvement project that you've been looking or maybe it's your dream kitchen, look at how that would make you feel in the short term versus what you could potentially do with that money to grow it over time to build your wealth.

So visualize some scenarios of spending that inheritance versus investing.

Ask yourself the question, what would your parents or grandparents want you to do with this sum of money?

So here's some considerations to keep in mind when receiving a windfall.

Number one, take some time to reflect.

Before making any hasty decisions or planning to go on that trip or getting quotes for a kitchen remodel, take some time to reflect on this newfound wealth.

And think about the impact of what this wealth could do for you and your family, not just now, but in the next 10, 15, 20 plus years.

Number two, seek some professional advice.

If you don't work with a financial advisor, get in touch with an advisor.

Ask them a question like, if you inherited this amount of money, what would you do with it?

Have an advisor that truly understands what's important to you, can help you build a nice diversified portfolio that can grow that wealth over time and make sure that you provide for your family in the future.

Number three, establish some clear financial goals.

If you don't have a financial plan, have a financial advisor run this inheritance through a financial plan to show you the true impact on what it could do for you and your family.

Maybe it would allow you to retire five years earlier or 10 years earlier.

Maybe it will allow you to take more of those dream chips that you have always wanted to go on 10, 15 years from now.

So a financial plan will show you the true impact on your wealth and whether it works or makes your financial picture that much better.

Number four, avoid lifestyle inflation.

Now, it's tempting to upgrade your lifestyle when you inherit money.

Maybe you buy a new house.

You guys want to get a bigger house.

Maybe you buy a new car.

Avoid some of those impulse decisions to increase your lifestyle because now you have more wealth.

Number five, have a financial advisor.

Sit down, understand your goals and your risk tolerance and build a diversified portfolio for you to have a strategy to grow your wealth, but also do some things that you've been wanting to do with some of the income that you could get from a nice, quality diversified portfolio with a dividend focus.

And number six, consider some legacy planning.

Maybe you want to give back to the community.

Maybe you want to use some of that dividend income from the portfolio to give to your church or to the Red Cross or some organization that you're passionate about.

Think about setting up some type of plan to do that if that's important to you.

So in conclusion to today's podcast, this is a big subject.

There's going to be a lot of wealth transferred over the next 10 to 20 years.

And some of you are going to have this situation where you have a huge lump sum of money that's being put in your account and you have to do the right thing with it.

And if you'd like more information on inheritance planning or just need some financial questions answered, you can go to my website at www.momentouswealthadvisors.com.

And I do have a special section on inheritance advice.

If you just put a slash in an inheritance and then a hyphen advice, that'll bring you to the page where I talk about my three step process and how I can help people make sure that make frugal decisions with their windfall.

And that's it for today's episode, Wealth Decision Number Six, Be Frugal with Windfalls.

If you'd like to schedule a discovery call with me, you can go to my website at www.momentouswealthadvisors.com and I'll spend some time to get to know you a little bit and find out if I might be able to steer you in the right direction or help you with your financial future.

Listen to this episode on Apple Podcasts or Spotify


-Brian D. Muller, AAMS® Founder, Wealth Advisor

Momentous Wealth Advisors in a fee-only fiduciary advisory firm

Disclaimer: This material is for informational purposes only and should not be construed as investment advice. Past performance is not indicative of future results. Investors should make investment decisions based on their unique investment objectives and financial situation. While the information is believed to be accurate, it is not guaranteed and is subject to change without notice.

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