In the Barenaked Ladies hit song, If I had a Million Dollars, they banter about the things they would buy if they had a million dollars. A million dollars used to be a lot more than it is today – enough to sustain you for the rest of your life. Now it is enough for a retirement if you are fairly frugal and don’t go for a whole lot of frills. Still, the mighty million dollars is nothing to sneeze at and if you received that million dollars while you were still fairly young and had time to keep working, that million dollars could improve your financial situation greatly, essentially taking someone who is “normal” and putting them far down the path to financial independence. Here is what I would do if I were handed a million dollars:
1. I would put $12,000 into an emergency fund. This would mean I’d have money ready if I needed to make a car repair to get to work or a home repair that just couldn’t wait. It would also cover the deductible if I needed to go to the emergency room for an emergency surgery. This would keep me out of debt.
2. I would pay off any credit card debt. At 18% interest rates or more, I can never make more investing that I would be owing the credit card companies, so it makes sense to pay the cards off. I actually don’t have any credit card debt, but if I were the typical person, I’d have about $30,000.
3. I would pay off my car loans. These might actually be at a fairly low-interest rate, around 4% today, but still why should I be paying interest to a finance company when I could be saving that money to pay cash for my next car? If I were typical, this might be another $40,000.
4. I would pay off any home equity loans or home equity lines of credit. Given nothing else, my home will be my nest egg when I get older. At retirement time I can sell my home, move into a small condo, and live off the interest from the home equity for a long time. This used to be the retirement plan before many people started using their homes as a piggy bank. Let’s say this is another $60,000.
5. I’d pay off the home loan. This may seem really silly, given today’s low loan rates. Still, it bothers me that someone else owns my home and I need to make payments on it. I’d rather own it outright and then not need to worry about making mortgage payments if I lost a job. Also, think how much I could do with that money if I were not making that big mortgage payments each month. Let’s say this is $200,000.
So far we’ve spent or saved $342,000 of that $1 million, leaving $658,000. What would I do with the rest? Investing, of course, because I want to see that money grow and stick around.
6. I’d put $300,000 into a retirement fund. I would put as much as I could into an IRA or my work’s 401K, my wife’s IRA and 401 K, and wherever else I could put it where it would be sheltered from taxes so it could grow. Note for the 401K’s I’d make payroll contributions at the maximum amount and replace the money needed to live with money from the $1 M windfall, so I could get the employer match (plus I couldn’t contribute directly anyway). The rest of the money I’d put into a set of equity mutual funds and sell off enough of the funds each year to make up for the additional salary I was putting into retirement accounts. It might take a few years, but I’d eventually get the whole $300,000 in tax sheltered accounts. These would be invested in good growth mutual funds and hopefully double in value every 7-10 years, meaning it would be worth $1 million in about 15 years, then $2 million a few years after that.
7. I’d put $100,000 into a car fund. This would also be a set of mutual funds. Every four years or so, on years when the market did well, I’d take 15% of the funds out of the mutual funds and buy one (or two) nice, 4 year-old used cars. Because I would be buying used, I’d save a lot on depreciation and would be driving nicer cars than my friends for less money (I’d be paying half as much). This fund would also double, on average, every 7-10 years, so my cars would get nicer each time.
8. I’d put $150,000 into a vacation fund. Again, this would be spread out into several growth stock mutual funds. I’d take 8% out every two years and do something really nice – a cruise, an international trip, or rent a really nice place in the mountains or on the beach. Or maybe just a long road trip, staying at nice hotels and seeing the sights.
9. I’d take the remaining $108,000 and start an individual stock fund. I’d find five great companies – the best ones I could find in different sectors of the market, and buy 500-1000 shares of each, buying in a couple hundred shares at a time. These I’d plan to hold long-term, allowing the businesses to grow and flourish. If any position got too large, I’d sell a few shares and add it to the retirement, car, or vacation fund.
Actually, there is one fund missing – the giving fund. I’d take $50,000 out of the vacation fund, $8,000 out of individual stocks, $22,000 out of retirement, and $20,000 out of the car fund. With this money I’d create a giving fund. I’d put this money into mutual funds (growth stocks, large stocks, and some income/bonds). Each year I’d take 5% from this fund and give the money to help others who had bad things happen to them. With time, this fund would grow as well, so i could give more.
So this is how I would use a million dollars. What would you do?
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Disclaimer: This blog is not meant to give financial planning advice, it gives information on a specific investment strategy and picking stocks. It is not a solicitation to buy or sell stocks or any security. Financial planning advice should be sought from a certified financial planner, which the author is not. All investments involve risk and the reader as urged to consider risks carefully and seek the advice of experts if needed before investing.