It is no secret that I am a mega fan of Get Rich Slowly and I read the articles over there almost every day. One of their weekend articles was a story from a reader who won a $1M jackpot and how she went on to invest the money prudently. Tina (the winner’s wife) explained how they sought help from a financial planner, and how they ultimately invested the money in a way that paid off, per the planner’s recommendations.
She must have hired a really good planner; I couldn’t find anything wrong with their decisions. Giving money to charity, raising their insurance safety net, buying a dream house (non-extravagant) and saving for retirement in an 80/20 stock to bond ratio. Just perfect!
Then I thought, What? Wait a minute. Is this the only way to spend $1M? Money that appeared out of nowhere? Since my childhood, I have aspired to become an entrepreneur one day. I’m always looking for ways to start a venture. The only thing preventing me from doing so right now is some legal matters (you don’t need to know) and lack of startup capital.
I don’t want to invest my savings in something that might fail, rendering me and my wife miserable. But a $1M jackpot would have been the perfect opportunity for me to start something on my own. Opening a shop, buying a franchise for a fast food chain, setting up an online store, investing the money in a startup, buying out a dying company or investing in real estate… Opportunities galore!
I guess I am not the only one thinking about doing something big or risky with a sudden lump sum of money. There are people who will first try to build a safety net around their retirement. I define this “safety first” mentality as a middle class mentality.
A middle class mentality gives rise to increased saving, resulting in a greater supply of money in banks, which leads to reduced interest rates. Lower interest rates lead to a boom in economic activity as businesses have access to the money at better rate. A growth of businesses brings economic growth.
On the other hand, an entrepreneurial mentality gives rise to a direct increase in the number of businesses and employees hired by those businesses, which in turn increases saving and also results in economic growth. Definitely many times more than what could be achieved by saving first (middle class mentality).
I think many readers will argue against investing money in a risky proposition, but do remember that someone took a risk and created a business, which is now providing you with bread and butter.
Investing in starting a business vs investing in stocks and bonds differs in the way each is utilized for growth of the economy. With the first option you have total control over your investments and get to keep everything you earn; but with the second option, your risk and reward are both limited. Basically you are limiting your growth!
That’s what I think, readers. What would you do if you won a significant amount of money by some means? Are you open to take risk?
Aaron hung @ aaronhung.com says
I’d invest it right away so I can prolong the rewards rather than spending everything in one place.
So you will go the safe way..saving it rather than using it for creating something bigger
Jeff @ Sustainable life blog says
I’d be open to taking a risk with a windfall that large, though I wouldnt be willing to risk all of it. I’d probably set aside money for taxes first, then take approximately have of whatever is left and consider starting a business.
there you go, at least got someone who think a like, thanks Jeff
Whatever you got is after tax cut, no one will give you money without first deducting the tax. Now I assume that you will invest everything on starting business. What you have in mind exactly?
Financial Success for Young Adults says
I would probably go the safe route first and pay off debt and put aside some savings. I’d rather start a business with less money because then I would still have the hunger to make it work. So many people start a business and throw money at it because they can but don’t know how to work it with out the cash.
I like this cautious approach I too tend to think in this direction. Probably I will go with 50% of the money and then as I progress, I will contribute rest of the amount in chunks. good thinking
Greg Miliates--StartMyConsultingBusiness.com says
I actually think this is a false dichotomy: it’s possible to use a windfall to both build safety AND start a business.
With the abundance of free and low-cost online tools available, it’s now possible to start a business with very little capital required. That’s true of service-based businesses as well as product-based businesses.
Maybe what the safety of a windfall provides is the freedom to be able to start a business without having to worry so much about paying your monthly expenses. However, even that fear can be eliminated if you start a business as a side venture in addition to your day job, test your business idea on a small scale, and then build it using your revenues instead of taking on debt.
For most Americans, starting their own business is unfamiliar, scary, and seems to be an extreme risk. I don’t buy that myth: having started and run my business during the worst recession in the past 70 years, and QUADRUPLING my former day-job salary, I’ve actually found that owning my own business is MORE economically secure than a day job. My impression is that many immigrants (my dad was an immigrant)–having taken the risk to move away from their home country–are willing to do whatever it takes to succeed, and often see starting a business as a viable option.
In talking with aspiring entrepreneurs, I’m left thinking that the bigger issue is people’s internal fears. Then, when a windfall happens, the first thing most people naturally think about is how to build safety, rather than how to build safety AND use a portion of the windfall to grow your nest egg and earning potential even more.
I believe its truly awesome view point Greg. Thanks for your time to post. I am still stuck in the day to day hassles of a challenging day job, you are obviously much more knowledgeable and have first hand experience of making a business a successful venture. You really have to manage your time like a genius to increase salary while building business. I doubt a lot of us have that, but we never tested our self. I always think of making my life better than just an employee earning salary, I want to do bigger. Thanks for your comments once again.
Greg Miliates says
It’s always nice to know that someone else shares your point of view. 🙂
While starting/building a business isn’t for everyone, from talking to a lot of entrepreneurs and business owners, it seems almost universal that our own internal fears, mental barriers, and erroneous beliefs are the primary things holding us back.
Business isn’t rocket science, and it doesn’t need to be risky. Starting small while you’re working a day job is how many people start a business. Then, when it grows to a point where it can pay your bills, you can quit the day job to focus on building the business. By that time, you’ve already shown that your business idea is successful, and you’ve learned the ropes of how to run a business.
Creating a business does take hard work and persistence, but our mental barriers are typically the biggest roadblock that we need to work through. I have a recent blog post about this topic as well, and will also be releasing an ebook on how to identify and work through mental barriers.
I would invest the “safe” way, but put aside a portion for entrepreneurial ventures. I probably put 100k in a bank account to start a small business. That way even if I lose the seed money, I would still have the safe portfolio to fall back on. How much money do you need to start a small business anyway? I’d rather register an LLC and get a loan from the bank if I need more than 100k.
if you have money, then why to take out a loan and pay interest? remember this is a windfall, even without this money you are safe..
I treat money earned differently vs. money won! I put money earned at risk when I invested in income property and businesses. I think I would be more conservative now because I am much older and can not earn it again.
As you grow old you grow wisdom. You have lesser years to feed yourself and family, why don’t you take risk. Well, I believe you are financially healthy now.
Hunter @ Financially Consumed says
Great article by the way. I really like your writing style SB.
Here’s what I say I would do here, whether I would actually do this is another matter: I would invest the money in funds and live off the income that I could generate. With time on my hands I would develop a business plan for a new venture and convince other investors to fund it. If possible, I would try and have the best of both options.
This is a new vista you opened. Great idea to make sure you are financially independent and then making a quit to build something on your own. I hope readers who commented/visited earlier come back and take a look in to your comment. Superb twist! 🙂
Shaun @ Smart Family Finance says
You really struck a cord with me. I’d totally take a portion and go into rental business!
Investing in anything takes research. If you do your homework, just like you should with investing in the stock market, I don’t see why entrepreneurship has to be more “risky” than the stock market.
BTW, you don’t always need capital if you know how to find and pitch to investors. If you have a good angle, you will find interested potential investors.
no matter what business it is, important thing is using the windfall to create more wealth. You might say I don’t need much wealth, but I would say look at Bill and Warren they don’t need anything now in their life, still they continue to create wealth. What they will do is giving out to charities. You use your power and money to improve the poor, the needy that’s one of the very important factor why you should create wealth and don’t just save it in retirement saving.
Lisa @ Cents To Save says
If I would win one million dollars, I tithe, pay my debt, pay off my house, and then invest the rest so I could retire from my real job. Then I would travel a bit, and enjoy life. If I did get bored, I would volunteer or mentor.
Go Fall Team #4!
Go Fall team 4! Lisa you are a safe player. But good to know you are willing to do volunteer work.
Secrets of a Financial Advisors Wife says
If I won 1 million dollars I would pay off all of my debt (cars, house, credit). Then I would invest the rest. I would put a small amount into the Markets and the rest into commercial real estate.
Definitely agree, if you are in debt go pay it off first with the windfall money. Glad you are also thinking my way.
Jason Fonceca says
This is one of the greatest, clearest, most succinct looks at the impact of entrepreneurial and middle-class mindsets on the economy. It always seemed to me that both were sort of… required, or playing a key role. 🙂
Personally, I much prefer entrepreneur style. Thanks for sharing!