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As a kid, receiving anything more than $20 sent my mind on a wild adventure about the endless possibilities of what I could buy.
As I grew a bit older, my sights began to get a bit higher. What can I buy with a million dollars? A jet? A yacht? A life without work?
Unfortunately, the saddest realization upon growing up and entering the working world is that, while accruing one million dollars is an achievement in itself, it can by no means support a person for long, much less the remainder of their lives.
Let’s be real though, as a kid I also used to think that I could eat ice cream and candy for dinner once I grew up, and that notion only faded a few years ago if I’m being honest.
So, I can’t eat junk food each day without compromising my health. Also, a million dollars can’t buy everything in the world on its own. While disappointing, that doesn’t mean I can never eat sweets, it just means there is a healthier and responsible way to go about it.
Handling a million dollars is a significant amount of cash. It should be approached the same way and treated as carefully, since your future personal finances may desperately depend on it. This then becomes a guide less about, ‘How to spend a million dollars,’ but instead, ‘ How to spend a million dollars wisely’.
Though there are a lot of avenues when it comes to allocating money and budgeting it out to suit your needs, I feel the most important of these is to set up an emergency fund for yourself/your family. Especially given the relatively volatile financial events that have been faced in 2020.
Investing in stocks, which I will discuss shortly, will ensure you have a stable income in the coming years. But the fact remains that global economic volatility is still possible, though unlikely in 2021-22 as the world begins to recover from COVID.
There are suggestions for this fund that range from being half of your expenses per year all the way to 18 months.
Whether you have the money on hand already or are still saving up, approximately 3-6 months of your income should be put in your emergency fund. It won’t earn much (around 0.05% today), but it will be stable and available for when that rainy day inevitably comes.
The Road Map
With your emergency fund created/bolstered, which will be useful no matter your financial situation, its time to take a look at what your priorities are and how these million dollars can get you to a better place quickly. It would be a good idea to use this as a sort of checklist to determine how much reparation and preparation your finances may need.
Paying Off Debts
The goal here is NOT to immediately pay off ALL debts, but to instead alleviate the pressure on you being produced by ‘bad’ forms of debt. Most often those with high-interest rates, such as those for cars, consumables/goods and services, and credit cards.
Credit card debt alone in the US has been found to be around $5,700-$6,000 per household. This isn’t crippling with a million-dollar windfall, but substantial, nonetheless. Paying these off will be essential to build good credit.
In a similar vein, refrain from paying off student, business, or real estate loans right away (be careful, however, if you have a second mortgage, as it can negatively affect your credit.
Paying these off over longer periods of time will show that you are reliable, in good standing, and a worthwhile investment when being considered for future loans.
401k and IRA
Contributing to either a 401k or IRA fund may seem confusing at first, but it mostly comes down to what will be most beneficial to you first when planning your retirement.
Will your employer match your contribution up to 3-4% of your salary? It would probably be best to start with a 401k, simply because they’ll match your initial contribution – a salary of $60,000 with a 3% match means they’ll match you up to $1800 = $3600 contributed total. However, you can contribute up to $19,500 (for 2020 and 2021) in order to reach the annual salary deferral limit.
The benefit here is that you won’t pay taxes until you withdraw these funds, meaning you can save that $19,500 plus the $1800 from your employer as stated above, basically a guaranteed return.
If your employer does not offer 401k matching, it would be wise to put this money into an IRA. Currently, the contribution limit is a combined $6,000.
Choosing traditional vs. Roth essentially comes down to whether you want an immediate tax break or if you’d rather tax-free growth, respectively. For both your 401k and your IRA, whenever you max your first one out, it is still worthwhile to begin contributing to the other.
This strategy is good even without the prospect of your million-dollar stash, but having it allows you to contribute to these accounts to their maximum potential. In this case, about $20,000-$40,000 could be used here depending on whether you want to contribute one or two years (the second contribution can only be applied on or after January 1st of the next year).
The Stock Market and Investing
Most likely, investing in stocks would probably be one of the first things to come to mind if you’re asked what to do with a million dollars. The notion of investing in the stock market is certainly intimidating at first and it prompts you with several decisions before you even have a chance to funnel your funds into Bitcoin.
Cryptos are truly interesting and have the benefit of being a potential boon of wealth, but are notoriously volatile in nature and are not a suggestable safe investment source.
For the intents and purposes of generating both a significant and stable source of income for your future, the easiest route would be to invest in index funds. Directing 30-40% of this million into index funds is advised as the ROI has been consistent and reliable.
It is entirely reasonable to take your chances looking for the next big industry to take off or try to make it big through day trading, but the odds are that you’re not looking to stress yourself out and work extra while you’re already at work.
While investing in these indexes does require your attention, you will often be able to let them grow without much intervention.
It’s true that you can have someone else manage this for you, often taking a 2% (which, unfortunately, would be about half of your returns given the 4% rule), but managing these funds yourself gives your control over your finances with little to no additional stress given the performance of index funds.
All that being said, some indexes to consider investing in would be the Schwab S&P 500, Fidelity ZERO Large Cap, Vanguard S&P 500, iShares Core S&P 500 ETF, and the SPDR S&P 500. Just remember to keep an eye on the expense ratios.
Real Estate Investing
One other way to begin generating extra income over the course of a year utilizing a decent portion (~$450,000-$500,000) would be to get into the real estate investment market.
This can be boiled down into 5 routes: renting, rental property investment, REITs, online real estate platforms, and flipping properties.
Rent a Room
Renting out a part of your property is perhaps the simplest way to get a taste of this form of investment. It simply involves you renting out a portion of your house through companies like Airbnb and making a small profit by letting them stay in your home for a short time. Somewhat risky and not for everyone, but it can be a quick deluge into a rental.
Second, investing in rental properties is a bit more complex and takes a lot of funding, but can pay off well. This involves buying a unit, or several (even a whole complex) and renting out the rooms/units at a slightly higher rent. Delving into rental investments this way can involve some extra expenses, like for a property manager or repairs if you choose to take control.
REITs are generally traded publicly and can be bought through several brokerage firms, similar to mutual funds. These are profitable due to their tendency to produce high dividends but can be relatively volatile, like any other stock.
Online Real Estate Investing
Online real estate investing platforms allow easy access to development firms/projects and offer quarterly/monthly distributions but present much higher risks and are difficult to pull your money out of (not liquid). Additionally, they require consistent large investments in order to see significant payouts.
Finally, flipping properties is the least suggestable route to producing income, but is still viable. The process is simple in theory, purchase a relatively cheap property that needs some work done, fix it up, sell it for a decent profit.
The problems here mainly arise when trying to estimate how much work needs to be done and how much it will cost; there are often several costs that are not fully identified during inspections and can considerably rack up expenses to the point where you may barely break even.
There’s also the housing market that is currently stable, but some studies have shown future interest in purchasing houses is questionable at best, though significant data on post-Millennials is still being collected.
For Every Good Idea, There Are 10 Bad Ones
With all of these financially responsible decisions laid out, I feel it would be a bit of fun to poke around and find a few irresponsible ways you could spend that million dollars, ultimately quashing your dreams of ever searching ‘ what can you buy with 50 million dollars ‘ (a bit hopeful, but we can dream, right?).
First up for a square million dollars, you could purchase the Luvaglio Laptop, which offers a 17-inch screen, Blu-Ray capability, USB (which, I guess, is a feature now), and a 128 GB SSD. Oh, and also fine diamond detailing on the power button, of course. You probably won’t have to worry about this temptation too much, however, because the director of Luvaglio has to invite you to purchase it, a real shame.
Next, you could buy any number of seafaring crafts, like that yacht I’d always dreamed about when I was younger. So, the cheapest yachts will only put you out about $150,000 or so (maybe less depending on if it was used before), but the real kicker comes from upkeep/maintenance. Not only do you have to pay for a crew to maintain it (size-dependent, unless you have no interest in learning ship maintenance at all), but there are also the dockage and fueling expenses that really will sink this idea before it leaves the harbor. Even minimal estimates per luxyachts.com have the cost reaching just over $500,000/year. But it’ll be fun for the two weeks you’ll use it!
Another bad investment, unless you happen to be a genius at MIT, would be to invest and spend that million on lottery tickets. Huge risk, little reward, but if you happen to be an expert in statistics and probability, you could give it a shot.
Finally, and I feel this would be the worst way to drain your account, would be to rent a luxury apartment in a major city without stowing any money away. Buying a unit would at least leave you with the option to rent it out to someone else for a while and you could recoup some of your losses.
In New York City, some apartments truly can reach prices of over $16,000 per DAY. Any one of these could certainly put you back a good deal, especially the lottery, but the prospect of apartment rental is an ideal that is coveted but will never pay off.
The Short Version
- Create an Emergency Fund
- Build a Plan Around Your Finances
- Pay Off (Bad) Debts
- Contribute to 401k and IRAs
- Invest in the Stock Market & Real Estate
- Don’t Party TOO Hard
Given that you at least adhere to this guide even marginally, you should be well on your way to stabilizing your income without jeopardizing your wellbeing or sanity.