Windfall

[thelamb]

I'm about to receive a windfall of cash.  It was part of a compensation package and fully expected, but maybe not this soon.  In one fell swoop, the last little bit of super cheap, secured debt will be gone (does not include mortgage), net worth will increase by almost 50%, and I'll be at 40% of my goal for FI, which I am now on target to reach in less than 5 years.  It's a huge boost, but there's still a long way to go down this path.  The prescribed, safe move is to just chunk it all in basic index funds or something similar, but there's a part of me that wants to do something fun with a small portion of it:  team up with a local restaurant owner and get in on one, flip a little house, something tangible and local.  I don't know.  Because while it is expected there is a sort of gee gosh I can't believe this is happening feel to the whole thing and maybe I should have some fun with it. 

Maybe a stupid thought process.  Anybody have similar experiences?  Perhaps I should be commenting in MMMs latest post cuz it's kind of similar.   

[Freedom2016]

When you say "have fun" with a portion of it, what is your risk tolerance? Seems to me that getting in on the restaurant scene, or house flipping -- while yes having lots of "fun" potential -- also carries a fair amount of risk if you've never done either.

We have had a similar year. What has helped us make decisions is being clear on our investment plan, our desired AA, and our shorter-term savings goals. Once we had that picture formed, I looked at our AA and thought, "gee, perhaps getting into real estate would be a good way to diversify..." So for us the idea of RE has become our "fun" thing -- though right now we're in the heavy learning and research phase, and actually we may put it off for another couple of years since we want to build a lot of liquid savings for a house purchase in <2 years. Re real estate, I figure I can reduce a significant amount of risk by arming myself with knowledge and not making rash decisions.

[Beric01]

If your path to FI is real estate income, then you could look into that. But house flipping is highly risky according to everyone I've ever heard talk about it, and carries a lot of unexpected costs.

Personally, I would just put it into index funds and be that much closer to FIRE. But maybe that's not the answer you're looking for.

[Gone Fishing]

Do you have a fair amount of extra time on you hands when you don't mind working instead of leisure?  All these "fun" things require quite a time commitment and an extra element of hassle, like a tenent calling you to inform you you have possums in the attic (yep, just last week).   I've had all the "fun" I care for, now I just chunk any lump sums into the existing portfolio, might be boring but doesn't require any time commitment on my part.  If you have free time, why not start with a part time job at the restaurant, or provide day labor to another house flipper.  This will help you learn the ropes without putting anything at risk.  BTW, restaurants are notoriously risky!

[Nords]

I'm about to receive a windfall of cash.  It was part of a compensation package and fully expected, but maybe not this soon.  In one fell swoop, the last little bit of super cheap, secured debt will be gone (does not include mortgage), net worth will increase by almost 50%, and I'll be at 40% of my goal for FI, which I am now on target to reach in less than 5 years.  It's a huge boost, but there's still a long way to go down this path.  The prescribed, safe move is to just chunk it all in basic index funds or something similar, but there's a part of me that wants to do something fun with a small portion of it:  team up with a local restaurant owner and get in on one, flip a little house, something tangible and local.  I don't know.  Because while it is expected there is a sort of gee gosh I can't believe this is happening feel to the whole thing and maybe I should have some fun with it. 

Maybe a stupid thought process.  Anybody have similar experiences?  Perhaps I should be commenting in MMMs latest post cuz it's kind of similar.   

If you're really not sure, then put it into a money market fund for six months and start keeping a diary of your feelings about it.  But for gosh sakes', if it's company options or stock then hire a CFP or a tax CPA to figure out the fastest tax-efficient way to diversify that asset into cash. 

Some windfall recipients feel varying degrees of "I don't deserve this" or "I'm going to permanently raise my lifestyle!" or other self-defeating emotions.  If that's you then read the stories about lottery winners or "the perils of sudden wealth" or library books on the topic. 

It doesn't sound like it's you, so check your asset allocation plan and then start thinking about how you're going to DCA your money into it.  Set aside enough of the cash to pay your tax bill (including AMT, state, and local taxes).  Set aside another 1%-10% of this money for charity or gifts to family/friends or a new material possession or a fantasy vacation or some other significant life experience.  If you must take a moonshot with some of the windfall then tweak your asset allocation to devote 5%-10% toward the moonshot asset class and have a great time with it.  If you've been wanting to invest in restaurants or medical marijuana or Lending Club then by golly, here's your chance.  Not to imply that LC is less risky than restaurants or medical MJ.

Then put it into your asset allocation.  You could do it all in a lump sum, or over a 12-month period, or start with a 12-month increment and dump a little more in whenever the market has a down week.

The key is to make the money work for you, not just work you over.

[thelamb]

Great advice nords.  That's basically what I was thinking.  After dealing with the tax challenges, set aside 1% for various purchases, 10% in savings/mm for, let's say more adventurous, investments and then the rest in the typical funds.  Then start putting 10% each month towards the adventure investment until either a.) something actually comes to mind and I have enough and I pursue or b.) I realize I'm not that adventurous and just invest with the rest. 

[Nords]

Great advice nords.  That's basically what I was thinking.  After dealing with the tax challenges, set aside 1% for various purchases, 10% in savings/mm for, let's say more adventurous, investments and then the rest in the typical funds.  Then start putting 10% each month towards the adventure investment until either a.) something actually comes to mind and I have enough and I pursue or b.) I realize I'm not that adventurous and just invest with the rest.

Glad to help, and here's why:

We get this question a lot, and you have a rare opportunity to share the experience (and your future badassity).  It would help a lot of other posters (and lurkers) if you'd start a journal here (http://forum.mrmoneymustache.com/journals/) and post once a month or so about your feelings, actions, and results.  You could even describe the nuts & bolts about the taxes or how you set up the transactions and move the funds around.

I also see this a lot in the military.  Someone gets a bonus (for whatever reason) and quickly turns it into a new pickup truck (along with several more years in uniform).  It could be $80K for a 24-year-old nuclear-trained technician who re-enlists for six years, or $30K/year to a 27-year-old lieutenant who agrees to drive submarines for another five years.  I'd rather be able to point the Seaman Schmeckels and LT Schmuckatellis to some anonymous poster who does it right and has a little fun along the way.

If you're reluctant to share your stuff on this forum then you could send me an e-mail to turn your words into an anonymous "Windfall!!" blog post.

And of course if you decide to go the sex/drugs/rock&roll route, then we'd appreciate pictures...

[thelamb]

It's been about a month since I started this thread and the thing happened earlier this week, which means I had lots of time to consider it all before it went down.  In that time I made a breakdown of where everything would go.  Once it occurred, there were slightly more withholdings taken out than expected, which changed things and I worked from the most important down to the most frivolous, frankly running out before I got there.  In the end, there just wasn't any room for me to invest in fun things, at least not in my opinion. 

It ended up being in the ball park of $90k and went down something like this.

The boring:
- $20k - pay off all debts, which were 2 0% CCs used to do a home remodel (they were going to convert to face punch rates in about 3 months)
- $5k - something I had to pay that I'd rather not disclose
- $5k - savings account for EF or possible future taxes

The prudent:
- $30k - set aside for a reinvestment opportunity expected to be 2-3x in 4 years
- $25k - vanguard index funds

Leaving not much for fun.  I'd hoped to come out with $6k for a house project but will be a bit shy.  I have in the past couple weeks bought a few pairs of jeans and shirts, a couple albums on iTunes, perhaps a few extra drinks at the bar; I guess you'd call that going wild.  Soon enough I will have the checking account back down to very little, will be feeling cash poor and fully back on budget. 

The short term positives aside, what this really allows me to do is get on, what I feel, to be a good savings/investing track that will look something like (per month):  max out 401k, $2k to vanguard fund, $500 to savings*, $500 set aside for house projects**.

* There's a number I'll get to then stop and switch this over to the fund (likely 1-2 years)
** I have a list and estimate and once done, same as above (likely 2-3 years) 

[MrFrugalChicago]

30k set aside for a reinvestment opportunity expected to be 2-3x in 4 years

Not many details there, but sounds very risky for 1/3 of your lump sum. If it sounds too good to be true (75-100% gain a year), it probably is.

[socaso]

If you wanted to do something fun that is still an investment you might consider investing in someone's small business via peer-to-peer lending. MMM has a couple of articles where he's talked about his adventures in P2P and I always thought I'd like to try it with some investment money.