What Would You Do With A $50,000 Windfall? Treat It Differently Than Hard-earned Money?

by golbguru on June 4, 2007

So you suddenly won/received $50,000 through some source (lottery, inheritance, etc.); how would you invest it? You have the following constraints:

You don’t need the money for at least 10 years, you’ve already maxed out 401k and Roth IRAs. Pretend that the windfall (lottery, inheritance, etc.) came under a couple conditions: 1) You can only invest it in one area. 2) If your investment doesn’t make 6% a year you lose it all.

Lazy @ Lazy Man and Money asked this question last week and invited some answers.

I mulled over it for a while - and mulled over it some more - and finally realized the predicament that lottery winners must be facing. Seriously, I had trouble trying to think what I would do with the money. Finally, I provided this answer (with which I am not very happy now):

Option 1: I would love to use that money to start a *good* restaurant on campus (or very near to campus). A few semesters ago, we (me and some of my classmates) did some ground work (for a class) on what would be required to open a restaurant in our town ~ I would like to see some realization of those ideas. With the kind of numbers we played at the time, we estimated that we would break-even (with respect to the initial capital) in about 3 years ~ and the earning rate will increase more with increasing popularity (and increasing enrollment of new students). Plus, it’s a university town - students are busy - they tend to eat out a lot and that works in our favor.

Option 2: Invest it in energy in a sort of “hedging” manner - gasoline, sun, wind, hydrogen, and nuclear. The demand for energy is never going to head down - gasoline may be replaced by hydrogen in the time to come - but you will need something to keep those millions of cars running. I don’t know what kind of a returns this will give me…but since it’s an unexpected windfall, I would be willing to take risks with it.

Going from 50K to 100K would definitely make me think more - although I don’t think it will affect my choice much (if it were $1 million, that would certainly make me change my choices). The time factor will also matter a lot - technologies become old and new ones attract more attention - accordingly, I wouldn’t want to stay rigid on the energy investment options. I would stay in the broad “energy” field, but my options would depend on what’s hot at the time. With the restaurant, it doesn’t matter if the time frame is 10 years or 50 years - if it’s a good restaurant, it will be etched on people stomachs for ever. :)

I noticed two (potentially harmful) tendencies here:

1. My perception of risk changed due to the source of my windfall (even though faced with the consequence of loosing all the money if it doesn’t earn 6%, I was still willing to take chances - which otherwise I would not have dreamed of).

2. The extra money may have made me overly optimistic - I later came to a conclusion that the restaurant idea was too optimistic with no real experience (lack historical performance perspectives - “statistics” for some people).

To make it clearer, let me say that if it was my own hard-earned money, opening a restaurant would have been the last thought on my mind - I would have perceived it as being too risky an endeavor. I might have gone for investing it in stocks - which would have easily earned more than 6% (after-taxes); even S&P 500 would beat that in the long run. Plus, with stocks, you have a historical perspective - so some amount of future prediction can be made [although, estimating future performance (extrapolating) based on past performance involves risks - it's less risky than trying to invest in something which has no past performance numbers (like the restaurant idea)]

Do you think there is a general tendency to take “more risks” with unexpected monetary gain? Would your choices be different about investing $50,000 if it were your own hard-earned money rather than an unexpected windfall?

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{ 17 comments… read them below or add one }

1 Shanna 06.04.07 at 9:43 am

Restaurant, definately. What interesting things did you find in your class research about opening a restaurant? How did you go about getting your information?

And my answer is yes, it would be harder for me to invest my own money in something like this as apposed to “free” money.

2 moom 06.04.07 at 9:43 am

No it won’t affect my perceptions but then I’m an econ professor :) For example I received a small amount of inheritance money from the sale finally of property we owned in Germany. I opened a Roth IRA with it planning to save towards a house purchase. I liked the idea of this money going from inherited property to property that I could actually live in. So I guess I did treat this money a little differently :) It’s looking likely now that I will end up closing the Roth when I likely move to Australia.

3 msminiducky 06.04.07 at 12:22 pm

I think that there’s definitely a tendency for most people to treat windfall money differently than earned money. Perhaps it’s the “free money” mentality?

4 Q at $1 Million to My Name 06.04.07 at 1:06 pm

As a young person no where near retirement, I would adhere to the same principles that I’m currently living by. Therefore, the entire amount would be invested.

“Earned” money is no different that “windfall” money - it’s still your money, and it’s still a test of your financial smarts.

5 GeekMan 06.04.07 at 2:00 pm

After looking over the original “rules” for this windfall, I’m wondering why no one else is looking at it as a big gamble like I do. $50,000 is not a life changing amount of money for most people, especially when you take into account that it would all be taken away if you don’t earn 6% a year over 10 years. For myself I look at it this way; if the money were mine I’d invest it in 5 mutual funds that track different aspects of the market. If the money were given or gifted to me then I might head down to Vegas and bet $10k in blackjack. If I win, even just that one bet, then all I’d need to do is earn a measly 4% a year for the next ten years which I could easily do in just an online e-savings account. If I win twice, then it goes down to under 3% a year. And so on. However, if I lose, it’s just too bad. Wasn’t my money anyway. I just bet again until I do win or lose it all. At least I’d enjoy myself!

6 db 06.04.07 at 3:10 pm

I’d be torn between investing it and putting it towards my evil student loan. I’d probably give myself a little (like $100-$500 mad money, but the rest would go to one of these two things (or maybe half to each).

I know what people think about not rushing the student loan, but the thing is so monstrously BIG that I’d welcome the chance to slash it so dramatically.

DB

7 db 06.04.07 at 3:11 pm

And, btw, $50,000 is a life-changing amount of money to me! That’s a lot of dough.

DB

8 Jenn @ Frugal Upstate 06.04.07 at 5:09 pm

I actually did recieve a large, unexpected windfall 3 years ago. After much thought we decided to pay off the rest of the mortgage on the house. Yes, there was a possiblity that I could have invested it and earned more than what I was paying out on the mortgage (which we had only had for about 6 months at that point-so we were still up to our eyeballs in the interest payments) but I knew for CERTAIN that I would save thousands and thousands of dollars by paying off the mortgage over 14 years early.

And I’ll tell you, the peace of mind knowing that our home is paid for and ours is great-once the cars were paid off we were (and are) debt free. That’s worth more to me than the possibilty of making a little bit more some other way.

9 Super Saver 06.04.07 at 7:16 pm

Golbguru,

I think I would try my hand at distressed real estate - e.g. foreclosures, short sales etc. Since I have to make 6% each year or lose it all, I would take a chance on a higher risk investment that has a chance to beat 6% every year. While the stock market averages 8-10% a year, it can easily have a year below 6%. I feel I would have more control on returns with real estate, but at higher risk.

10 stidmama 06.04.07 at 11:10 pm

My initial response is to put it toward the mortgage, which costs us 7.65% or so. It wouldn’t pay it off, but it would considerably reduce the length we were paying on the mortgage, and thus the amount of interest we pay out.

My other inclination is to put it toward microloans. I believe strongly in doing things that promote other peoples’ well-being, and microloans can make the difference between a decent life and one of poverty. There is a local credit union that does this, and with this kind of money I could invest both wisely and within my own community.

And a third choice, which I almost ignored, would be to put it in CDs or bonds (whatever makes more money) for ten years, then use it to finance the Big Trip I have always wanted to take with my kids (and by then, their spouses, no doubt).

A good question. The last time we had a windfall, we used it to pay off our student debts and put a downpayment on our house…

11 Ursula 06.05.07 at 7:26 am

Well, being a rule-breaker, I’d ignore those stringent rules you laid out, and I’d take that $50K, scream out WOOOOOO-FREAKIN-WHOOOOOOO, and then pay off my 7.14% line of credit! :)

12 MossySF 06.05.07 at 10:07 am

I already replied with the math on Lazy Man’s site. The 6% requirement converts what would be an investment question into a gambling question. So you decide the timeframe, calculate what the odds of not meeting less than 6% for typical investments and then pick the closest high risk option that matches the same rate of failure.

Think it through. For an ordinary investment, would you accept only 10% returns if you had a chance of 40% chance of losing it all? No way. Instead, go to Vegas and put a bet on a 60% winner that pays out 80%. The odds of losing everything is the same but the return is 8X higher.

13 AroundTheWorld 06.05.07 at 1:23 pm

I would use the money as a down on a mid-size apartment building…. or I would use it to develop another self-storage facility.

14 Toby 06.05.07 at 2:37 pm

Recently, I was reading about various great money managers and I ran across an interesting tidbit. Many “great traders” do a terrible job of managing their own portfolios.
It would seem that managing OPM (Other People’s Money) gives them the freedom to make the risky but rewarding plays. Trying to manage their own portfolios in a similar way tends to backfire.
I’m guessing that dealing with their own hard-earned money causes a break-down in their discipline and emotion starts to undermine their success.
I would expect the same sort of behavior from most people (myself included). I would certainly take on riskier investments with a windfall then I would with my own portfolio.

15 pfstock 06.06.07 at 12:37 pm

This actually happened to me as the firm offered me an unexpected $50,000 bonus if I agreed to stay on board for at least two years. This was back in the waning days of the dotcom era. While I agreed to pay back the entire sum if I left, the company did not guarantee that I would have a job during that two year period. Indeed, my position was terminated in the aftermath of the September 11th attacks.

Anyway, back to the $50k… Here in California, 40+% of that goes to payroll taxes, so it ended up being a little less than $30k. I had a bunch of expenses as I was getting married, and ended up spending almost all of it on the wedding and honeymoon. A few weeks later, the terrorist attacks occurred and life hasn’t been the same every since.

Ironically, if I had invested it at that time, I would have ended up with about half of my money by the end of 2002. Of course, the market has since recovered.

16 james B, 12.18.07 at 3:36 am

I WOULD PAY MY MANY BILLS OFF, TAKE CARE OF MT AILING GRANDMOTHER BY TAKING HER WHERE SHE NEEDS TO GO ,

17 James Johnson 01.06.08 at 2:38 pm

I am looking for good life and travel that my dream good living

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