Top 5 things I would do with a million dollars

Powerball/lottery fever has been going around lately. Recently a group of people won the $448 million Powerball jackpot.  Good for them.  I hope they use their money wisely and in a way that will benefit their families and communities for years to come.   This got me thinking on what I would do with a big windfall.  Getting $448 million would be nice of course but there would not be much thinking involved in how to spend it because that amount of money would erase all of the debt we have and leave us with more than we would know what to do with.

Dr. Evil can finally pay off those grad school loans.

So I thought about how to spend a large sum of money that would still require some planning.  I also wanted to assume I would continue working and making the same salary I am now.  I thought $1 million (after Uncle Sam’s bite of course) would be a good place to start, so here are the top 5 things I would spend it on:

  1. Student loans.  This is a no-brainer for me as my student loan payments currently total $1200 a month.  Getting rid of these debts alone would be enough for me.  One thing to consider would be paying off the higher interest loans only as I do have some loans around a low 2% interest rate.  I could instead invest this money in an index fund and most likely make more than a 2% return.  There is also the maximum $2500 tax deduction from paying student loan interest.  But I’m leaning towards the huge psychological and income boost of getting rid of all the loans.  This would cost me around $140,000 leaving $860,000 left to spend.
  2. Siblings’ student loans.  Took me a little while to decide on this one because I wouldn’t know what to do with my life after student loans!  I decided to pay off my siblings’ student loans because having a family free of debt will help everybody and their loans aren’t anywhere near the value of mine.  Around $100,000 or so between all 3 of them.  And also I think this would be a much better gift than the inevitable hitting me up for cash requests.  This would free up money for them for the rest of their lives!  This would leave $760,000 to spend.
  3. Charity.  Now that the family house is in order, I would give a healthy amount towards charity.  I’m not exactly sure which charity but the problems that are dear to my heart include people going hungry and people getting sick and dying because of poor living conditions.  So it would likely be a good charity for one of these causes.  I would also like to give back to my community in some way.  I would spend around $100,000 for this, leaving $660,000 to spend
  4. Invest.  With over half a million left to use, I would then turn to investing.  I currently have a Roth IRA with Vanguard and a 529 with the state of Maryland.  I would focus on these since I’m already contributing up to the match in my company’s 401k.  The Roth IRA would get most of the pie because of much lower expense ratios and superior investment choices.  I would invest $300,000 in the Roth IRA and $100,000 in the 529, leaving $260,000 to spend.
  5. Mortgage.  I’m actually not too worried about getting rid of the mortgage completely since eliminating student loan debt will free up more than enough money.  Also I don’t believe in tying up too much wealth in a house because townhomes (which is what I have) don’t generally appreciate as much as typical single family homes, and it would be a pretty illiquid place to keep the money.  I would still like to build some equity though and have a nice down payment to use upon selling the house, so I would put $220,000 towards the mortgage, maybe using it to build some improvements on the house as well.  

Wait I still have $40,000 left to spend?  Guess my education wasn’t that great after all.  Seriously though, I think it would definitely be a good idea when receiving a windfall to leave some money to spend on yourself.  Always wanted to go on that African safari or European tour?  Ever wanted to buy that luxury car and not have to worry about a monthly payment?  This is what I’d use that remaining $40,000 for because sometimes you just need some money to spend on whatever you want.  Personally I would use it for vacation or three since I’m not really into fancy cars.

Well now that my million is gone, I would say I’m in a very good financial position.  Student loans paid off for me and family, healthy investment accounts, good amount of equity in the house and some fun vacations ahead.  Not bad at all.  What would you spend a million on?  Please comment below and share the wealth!

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Net worth: How can we use it?

One things I really like about knowing your net worth is how clear it makes the current state of your finances and how many different ways you can improve it.  It is essentially a live autopsy of your financial health, and with the information on hand you can determine where to make changes in your life.

Just like any good football team, it is essential to have a strong offense and defense.  Being too strong in one aspect over the other usually will not produce good results.  You can look at the value of your assets as your offense and the value of your liabilities as your defense.  If you have a healthy amount of assets but some high interest credit card and student loan debt keeping the amount of your liabilities high, that is a less stable position to be in than having a little less in assets but cutting out the credit card debt.  By looking at your net worth, you can see how a combination of making a little more money to increase your assets and getting rid of a little more debt to decrease your liability can make a big difference in the long run.

When some people find the value of their net worth, based on a number of psychological biases and assumptions, they try to decide of their net worth value is “good or bad”.  As I mentioned in my last post, the absolute value of your initial net worth is not important.  In fact, that number doesn’t mean too much because a couple who is just out of school will most likely have a high negative net worth while a child with five bucks in his pocket has a positive net worth.  Obviously the highly educated couple is in a better position to increase their net worth for the long term than the child currently is.  What is important is to keep your net worth going up consistently.

As a final point, most people who graduate any type of professional school, myself included, will most likely have a large negative net worth.  The combination of high student loan balances and being in the early stage of your earning career will likely push some net worth’s into the negative six digits.  While this may be discouraging to see, it is important to know that by paying off high interest student loans first and starting to make some real money, that net worth value will start to grow quickly.  As an example, my net worth upon graduating 4 years ago was around -$150,000.  That looks like a big hole but in just 4 years my current net worth is now -$90,000.  By optimizing my income potential and paying off high interest student loan debt, my net worth increased $60,000 in 4 years.  My goal is to break even (a whopping net worth of 0!) in about 5 years.

The power of paying off student loan balances and using that extra money to pay off your next balance is very potent in increasing your net worth.  I will discuss different student loan payment strategies and how to find the right one for you in future posts.

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Net Worth: What’s it worth?

There are many metrics you can use to determine your financial health.  You can track the amount of money you have currently in your checking account, the money in your savings account or a combination of both.  You can also track the amount of money in any investment accounts, the amount of student loan debt or even the value of your car and house.  All of these numbers can be useful and people put more emphasis on some over others.  The number I believe is most useful, however, is your net worth, which is a combination of everything.

What is a net worth anyway?  Definitions vary depending on who you ask, but the basic definition is that your net worth equals the value of your assets minus the value of your liabilities.  Now there is some disagreement on what makes up an asset or a liability.  Is the equity of your house an asset or is your mortgage a liability?  Should your house even be in the equation because you can’t really tap the value until you sell or take out a home equity loan?  Should the value of your car be included since it is always depreciating in value?  Should your small business expenses be included?  The list can go on and there are calculators such as this that can guide you: http://www.bankrate.com/calculators/smart-spending/personal-net-worth-calculator.aspx

Personally I include checking accounts, savings accounts, and investment accounts as my assets, and credit card debt and student loan debt as my liabilities.  I believe this is an easy and effective way to see how you’re doing financially.  While it can be fun (or frustrating) trying to figure out what is an asset or not, I don’t believe the details are really that important.  What is important regarding net worth is that you use it consistently from month to month to track how you are doing financially.  If your net worth is consistently going up over a 6 month period, that is a sign that you’re moving in a positive direction.  If your net worth is going down consistently, that might be a sign to examine it more closely and see what changes you can make.  What’s important is that you use it as a barometer to see how you’re doing compared to last month, and decide to stay the current course or adjust.

Now that we know what a net worth is and how it can be calculated, in my next post I’ll go over how we can harness this knowledge to produce an actual change in our finances.

 

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