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

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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.

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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.

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You know those little boxes you see when registering for a site? They’re called CAPTCHAs, and you probably knew that they are used on sites to ensure an actual human is registering, rather than a spambot. However, Did you know that they also help in digitizing books?

You can read a more complete explanation, but I’m just going to summarize by stating that the words you see are words that have been scanned, but the OCR software isn’t certain of the word. By showing the words to multiple people (who theoretically all type the same correct word), the OCR software can be more certain that it “knows” the right words.

What I love about this is how mutually beneficial this process is. An organization needs assistance from human beings to verify scanned text. Other companies and people want to protect their sites from being abused by spambots. CAPTCHAs provide a solution for both.

I was thinking about these and started thinking about skills I have and that the company I work for has and wondering if there was any secondary benefit I/we are missing that we should develop.

As I talked to a friend at work about this, I mentioned doughnut holes. The baker could toss the the extra dough—which would be a complete waste—or make another big dough ball and cut out some more doughnuts—not a waste of materials, but it does take time—or he could just throw the “holes” into the grease as well and sell them as bite-sized doughnuts—not a waste of materials, and almost no additional time.

My friend said, “So you’re asking, ‘What’s our doughnut hole?’”

“Exactly!”

I liked the way he phrased it and said I was going to use that when referring to this concept of creating a secondary value from a product.

So what do CAPTCHAs and doughnut holes have to do with this blog’s general theme?

Nothing.

Actually they relate in that a lot of us have skills or things that we like to do. I’m just recommending we try to think outside the norm and consider ways that we can use these skills or activities to benefit ourselves and others in ways we hadn’t considered before. It’s all part of managing and investing your resources.

So what’s your doughnut hole?

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Everything has a cost. I have alluded to this point previously but wanted to discuss it more specifically. We all make decisions that have costs associated with them. In general, I think there are many decisions we make that aren’t necessarily right or wrong; we should just be deliberate about them.

For example, a sense of financial security may be very important to me, and the stock market seems scary. I can make the decision to only “invest” my money in bank CDs. I’m trading the higher rate of return I could get from the stock market for the sense of security I feel with the bank. Long term there could easily be the difference of hundreds of thousands of dollars in lost interest by making that decision. It’s important that I’m honest and acknowledge that I’m foregoing great potential returns and a more comfortable retirement for a greater sense of security now.

Personally, this cost equation tends to be an element of most decisions I make. Take something as mundane as going out to lunch. It isn’t just an experience in which I eat and hope I have enough money at the end of the month to cover the meal but a recognition that I have a certain amount of money budgeted that I can spend on lunch. If I don’t spend it on lunch, I could spend it on something else. Neither choice is right or wrong; it’s just a conscious decision, assuming I wasn’t given the money by my dying Aunt Tilda, who asked me to donate it all to the beleaguered League of Penniless Penny Pinchers.

In general, I think we are often willing to trade a certain sense of security, pride, fun, or comfort now for less of it in the future. This can be security in the form of “I need to pay $25,000 for this new car so my family can be ’safe’;” or pride in the form of “If I buy this fancy techno gadget, I’ll be the envy of all three of my friends;” or fun in the form of “I will buy this boat when I am 22, even though it means it pushes back reaching my investment goals by 3 years;” or comfort in the form of “I won’t spend any money, because it’s wrong and I want to keep it all so that I can make sure I have enough.”

That last point is an extreme type of saver that is so focused on hoarding money that they lose the opportunity to enjoy the things that money can buy. That loss comes at a cost—everything has its cost. It seems best if we can find a balance—not fall too far on the hoarding side or the shopping spree side—and make conscious decisions about what “costs” we are incurring.

There’s my two bits on the matter. Do you see other costs or ways to consider them?

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