Wednesday, May 28, 2014

The 10% Rule

I've read that 70% of lottery jackpot winners have spent all of the money in five years.  Five years.   Can you imagine someone winning a $300 million lottery price and being broke in five years?  It seems to be all too easy if 7 out of 10 people do it.

Whenever I come into some extra money, I have a 10% rule. 10% of it can be spent on what ever I want. No questions asked; no justifications. That 10% is pure fun money.

The remaining 90% though, has to be spent in a more practical manner. I've never won the lottery but I believe the same principle, if applied, would keep that 70% of people from being broke.

This rule lets me have some fun when I get unexpected money while still maintaining a control over my financial future.   In most cases, the extra money would go on the mortgage or into the car fund but maybe we will decide to refinish the floors or fix something instead.

The point is to look at the windfall with an eye to the future and not just blowing all of the money.

Whether you come into $300 or $300 million, you should first stop and think before spending a dime of it.  Alternately, you could take that 10% and have some fun and then settle down and take stock before going any further. Do not spend more than the 10% without having a plan!

Keep in mind, the government generally gets its share.  Plan to give the tax man 40%; plan on 10% for yourself. You now have 50% of the money gone; just like that.

If you have any debts, pay those first. Next, set up a nice retirement account for yourself. Preferably something that you absolutely can not take the money out of the account early.

If you take the yearly payments, do not borrow against future payments. Spend it only as you get it.

You probably will immediately think about buying a house and a car.  You may want to just buy the biggest house or most expensive car. Check if that is really what you want though. Does your family of four need a 10 bedroom house? Probably not. You will most likely be better off buying a nice 4 bedroom house in a nice neighborhood.

Do not start giving money to anyone until you have set up your financial plan. If you win the lottery, you will immediately get calls from people you barely remember saying they need money. It is tempting to help them out and it would be a great thing to do for those in need but you need to get your own financial house in order first. There will be plenty of time to give money to charity.

Also, don't be surprised if people lie to you about needing the money because they think you now have plenty to share. 

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