Your Two Bits

Contradiction?

Wouldn’t you love to win the lottery? Many people would…and many people try. Unfortunately winning the lottery doesn’t mean you’re financially set for life, even if you win tens of millions. This article is a nice reminder of that fact.

There are so many cases of people winning large sums in the lottery and ending up worse off than they began, because they don’t know how to manage the money. The irony is that most people who understand how to manage their money and what makes a good investment are more likely to “spend” their money on investments that are designed to reward investors. The lottery isn’t designed this way. Only a few “lucky” people will win.

Unfortunately, once those people do win the lottery, they have a seemingly large supply of money that they know even less about managing than the money they previously had. This perception means that their already poor saving and spending habits are magnified, eventually leaving them worse off than where they started.

…unless they learn how to manage their money. If they have already learned how to be good money managers, they will likely be very careful about how they proceed with the lottery winnings. I would recommend proceeding with a combination of advice that two financial radio show hosts offer.

1. Celebrate (Clark Howard)
2. Wait (Dave Ramsey)

Clark Howard often recommends to people that they take 10% of their windfall, whether it is from the lottery, an inheritance, or unexpected bonus and do whatever they want with it. This allows them to enjoy the money and get some of that desire to spend out of their system, while keeping the amount reasonable.

Dave Ramsey often recommends to people who will be receiving a life insurance benefit that they park the money in something like a CD for 6 months. He advises them not to do anything major with the money, simply take some time to work through the grieving process. Similarly, in a lottery-type situation, people should park the money and take some time to seriously think through what they would like to do with it. Doing so will likely also create a reality check regarding how far that money will actually go.

Statistically (and by design), most of us will not win the lottery; however, many of us will receive unexpected money at some point. My take on your two bits is to celebrate with a small portion and then park the money while making a deliberate plan regarding what to do with the rest—you may even want to consider taking a money management course.

Photo Credit: Letra Pequna on everystockphoto.com

I read an interesting post about why Dave Ramsey Followers are Successful that basically states “the real reason that his followers have such great success is because they are ripe for change.” The author has hit the nail on the head. Dave Ramsey helps many people who have it rock bottom financially.

I call this the “Prodigal Principle.” We generally don’t feel the need to change unless our current course is causing significant pain. But like an alcoholic or the prodigal son, once we hit a real low, we start looking for help and a solution. I have encountered the same pattern. People who are at their wit’s end or are desperate for some type of solution to their financial woes are generally more open to discussing options and are much more inclined to take action.

I hope more of us can muster enough desire to change and improve our financial management before getting burned in the refiner’s fire. Listening to people’s stories on something like Dave Ramsey or Clark Howard’s radio shows can be quite motivating. It’s good to learn from our mistakes, but even better to learn from other people’s mistakes and save ourselves the trouble of the prodigal’s long walk home.

That’s my take. Feel free to share your two bits.

I read this article, “4 Dumb Financial Moves in the Recession.” The four points are legitimate and seem to be pretty common. I just want to focus on one item in the first point, regarding emergency reserves.

The author, Marilyn Kennedy Melia, recommends setting up automatic withdrawal to move money out of your checking account into some type of liquid savings. I think this is a good idea; however, I would also recommend taking another step before this. We have our paycheck automatically deposited into our savings account. Then at the beginning of the month, we move only the amount we have budgeted to spend that month over into our checking account.

The benefit to this method is that it helps keep you within your budget and from spending all of your paycheck. If you want to use additional money, you have to move that money over to checking. This reduces (should eliminate) impulse buys. At a minimum it requires you to acknowledge that you are actually spending your money, not just swiping a debit card. It’s sort of like a macro envelope system.

Of course doing this assumes that you have a budget for the month (I’ve heard budgets can be useful). If you don’t have a budget set up or are not following your budget as strictly as you should, trying this step can help motivate you to create better budgets or follow your budgets better.

I’ve had a few people I’ve shared this with comment on how helpful it is. If you’re not currently doing it, I highly recommend you try it out.

That’s my two bits. What are your two bits? Do you do something similar that works well?

I was thinking about stuff and decided to write my recession haiku.

Failed economy
Doom and gloom on all-day news
Six months’ income saved

That sums up most of my thoughts.

Which should you do, pay down debt or invest? You can find different arguments for or against, but I generally say that you should pay down debt, assuming you have a minimal amount of savings ($1000) to cover emergencies. A good list of reasons for paying down debt is provided in this post at I’ve Paid for This Twice Already.

However, my biggest reason is the risk factor. I think Dave Ramsey sums it up best when he says, “I’ve done extensive research and found that 100% of home foreclosures occur on homes that have a mortgage.” Sometimes he might substitute “home foreclosures” with “car repossessions,” but it’s the same idea: If you have debt, you have risk. And don’t get me started on the issue of people willing to incur debt-related risk where they’re sure to lose money but are afraid of investment risk where they have a good chance of making money.

Ultimately it’s up to you to decide how much risk you are willing to take; my main recommendation is that you at least make it a conscious choice.