Your newfound wealth from your company being acquired is a great thing, but you need to make sure you avoid some of the pitfalls that plague people who suddenly come into a nice sum of money. Here we will discuss some things you need to avoid to make sure your wealth is preserved, and even better, grown over time.
Spending it all
When you receive a large sum of money, your first instinct may be to go on a spending spree. Wouldn’t it be greet to buy that expensive car that you’ve always wanted? Or to take a really lavish weekend in Vegas? While these things are fun, they are ephemeral and will not help you in the long run.
Loaning/Giving Your Money to Friends or Family
I call this the “Entourage” Effect. If you’ve ever seen the show Entourage, you know that Vinny Chase, a Hollywood actor, supports his brother and two friends with his acting money. In the show, his agent and business manager often implore Vinny to stop supporting them because they drain all of his financial resources, often putting him on the verge of bankruptcy. This is exactly the position you do not want to be in. It is okay to help you friends and family who need it, but remember that you worked for this money and you should take care to guard it as well.
Buying a home, in cash
Buying a home is not a bad goal to have. In fact, it has some great benefits if you do it correctly. It can reduce your taxes, give you long-term appreciation of your money, and helps you fulfill that “American Dream” of owning your own home. However, there are some key things to think about when buying a home: namely, don’t buy it in cash. This may be counterintuitive, because many people will tell you that debt is the enemy, and while that may be true in some scenarios, using debt correctly can help you leverage your money and create more value with your money. Because interest rates are so low today, you should use it to your advantage, so here are some considerations for you:
1. Interest rates are at near all time lows. According to freddimac.com, the U.S.-backed mortgage lender, mortgage rates are near historical lows, with the average 30-year fixed rate at around 3.52% as of October 20, 2016,
2. The interest you pay on your mortgage is tax deductible, making the effective interest rate lower even than that 3.52%
A. For example: if you have a $1 million dollar mortgage at 3.52%, your annual mortgage payment will be around $55,000. Of that, you will pay about $35,000 in interest and $20,000 in principal in the first year (according to mortagecalculator.org). This means that you will have $35,000 more to write off against your income taxes, thereby lowering the amount of money you pay to the IRS in taxes, which means more money for you.
3. It is important to note, that if you do this, you need to invest your money some place that will get you some kind of rate of return. Spending the money you didn’t use to buy your home or leaving it in the bank earning nearly nothing will not help advance your financial situation.
Putting all your eggs in one basket
1. Keeping all your money in the company you work for.
- While you may have acquired a nice premium for having your stock acquired, you want to consider the following: wealth may be created through concentration, but it is preserved through diversification, so make sure your assets are well spread out amongst different investments.
2. Starting your own business may sound great, especially if you are in the tech world. After all, if you read my last article about acquisitions, you may say, “Hey, I just got a huge payout from this startup I worked at, if I start my own, I could get way more money.” This may or may not be true, depending on your skill set, and while starting a business is, by no means, a fruitless effort, many people rush into starting a business, not considering many things
- What are the risks?
- How much capital do I need to start this business?
- How many people should I hire?
- How much should my profit margin be?
- When will I break even on my investment?
- And many other questions
- According to statisticsbrain.com, half of all business started fail within 4 years of being started and 71% by year 10. Therefore, if you’re going to start a business, you need to make sure you do your due diligence and create a meticulous business plan. Consult with a financial advisor and some other professionals to make sure you’re giving yourself the best chance of success. Also, don’t put all your eggs in this new business basket.
We’ve discussed some common mistakes that people make after they have acquired a larger sum of money from their company being acquired. It is important that people not fall into these traps. Your newfound wealth may go quickly if you do not take the necessary steps to prevent that from happening. So, now that we’ve discussed what you shouldn’t do, let’s talk about what you should do. Tune in for the final chapter of our 3-part series.
By: Ayal Shmilovich
The opinions voiced in this material are for general information only and are not intended to provide specific advice or recommendations for any individual. To determine which course of action may be appropriate for you, consult your financial advisor. No strategy assures success or protects against loss.
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