What Would I Do If I Inherited One Million Dollars?

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retirement one million dollars financial planning financial goals

About a week ago, Sandy from Yes, I am Cheap proposed an interesting idea to the Yakezie Blog Network: she proposed that all blogs that were interested write a post on the common topic of “if you suddenly inherited a million dollars from your long lost cousin Bertha that you haven’t seen since you were a baby, what would you do with the money?” 


Since I absolutely love these initiatives where several different blogs write about a common topic (such as the Yakezie Blog Swap, which I always try to take part in), I was very eager to have the chance to reflect on what action steps I would personally take with $1 Million, if I were to be lucky enough to receive it. It also reminded me a great deal of a topic in the 2nd Yakezie Writing Scholarship Contest (which I helped judge several months ago) where essay applicants were asked to write about what they would do if they won the lottery. 


Inheritance/Estate Tax

Like it or not, the first 30-40% of the $1 Million would most likely have to be set aside to pay Uncle Sam for any estate, or inheritance, taxes that I would owe on the money. However, according to Kiplinger’s, Congress’ lack of action lately on renewing the estate tax in 2010 may allow up to $5 Million to be exempt from taxes. This would be quite a blessing!

Since I’m not quite sure what the verdict will be on this or if a final decision has been reached by lawmakers, I will, for now, operate under the assumption that 40% of the $1 Million be paid in taxes.

Amount remaining = $600,000


Play Money

Of the remaining $600,000, I would take 5% ($30,000) and set it aside for what I call “play money.” This amount of money would be small enough that I would be all right with losing, but would still enable me to “live it up” and enjoy the $1 Million.

Several possible things I would use the play money for are shown below:

  • A trip to Spain/France.
  • Buying new hiking or cycling gear.
  • A trip to the Grand Canyon.
  • Visit Yellowstone National Park.
  • Backpack on the Inca Trail.

Donate Money to Charity

Currently, I donate 5% of my income to a number of charitable organizations. However, the main one is the National Multiple Sclerosis Society, for which I participate in a bike ride each year in order to raise funds to support and find a cure for this disease.

With the $600,000 remaining after taxes of the $1 million inheritance, I would take 10% ($60,000) and donate it to the Multiple Sclerosis Society. I sure would be their top fundraiser then!!! retirement one million dollars financial planning financial goals

Amount Remaining After Play Money and Donating = $510,000


Achieve My Purpose Focused Financial Plan

With the remaining ~$500,000, I would invest it in achieving my Purpose Focused Financial Plan.

This is a system that I adopted after reading David Bach’s book, “Smart Couples Finish Rich.” A Purpose Focused Financial Plan is a very interesting personal finance strategy that David adopts with the people he advises in his financial planning business. If you haven’t read it already, I would strongly recommend that you pick up a $0.01 (cheap!) used copy of the book from Amazon - Smart Couples Finish Rich: 9 Steps to Creating a Rich Future for You and Your Partnerretirement one million dollars financial planning financial goals .


Essentially, what the strategy is all about is that people/couples should plan for their specific values and life dreams, as opposed to planning what material possessions are needed for life (can be easily influenced by contemporary culture).

Executing the strategy involves the four steps shown below:
  • Define the 1) importance and 2) purpose of money in your life.
    • 1) Involves ranking the importance of money in your life on a scale from 1-10.
    • 2) Involves a qualitative description of how you view the role of money in your life.
  • Determine and take action on your life values.
    • Your life values action plan is based around goals that you specifically want (and one could almost say need) to do in your life in order to be fulfilled
  • Determine and take action on your life dreams.
    • Your dream action plan is based around “fun” things that you want to accomplish in life that will enable you to live an extraordinary life, based upon your standards.
  • Place your dream and life values savings on autopilot.
    • This involves setting up savings vehicles to ensure that your values and dreams are met.

In particular, the things that I would use the inheritance for (relating to my Purpose Focused Plan) are listed below:

  • Ensure that I continue to contribute 5% of my income each year to charity.
  • Pay for traveling and participating in running and cycling races in various locations.
  • Max out my Roth IRA and/or 401k each year.
  • Maintain an emergency cash fund with 6-9 months of expenses.
  • Pay off my condo mortgage of ~$90,000.
  • Achieve my life dream of owning a cabin in the mountains.

Looking at this list, it’s impossible to think that all of these actions can be taken at once. Therefore, it will be important that the inheritance funds are invested in financial instruments whose liquidity, risk horizon, and maturity match the time frame in which the funds will be needed. A description of this time frame investment matching process/concept can be found here
For example, money that will be used in less than 2 years should be kept in a savings or money market mutual fund. Money needed in 2-4 years should be kept in a short term maturity bond. If the money isn’t needed for almost 10 years, it is best to invest it in a passively managed index mutual fund.

How about you all? If you won or inherited $1 Million, what would you do with the money? Would you save it, spend it all, or a mix?! Share your experiences by commenting below!

    ***Photo courtesy of http://search.creativecommons.org/?q=million%20dollars

    Comments

    1. Once a sizeable chunk has been swallowed up in tax, I think I'd buy my first house, hopefully bringing an end to my years in rented accommodation. A trip to South East Asia wouldn't go amiss either!

    2. That's a well thought out plan. 1M doesn't seem like a lot of money once you piece it out like that, right?
      My recent post If I had a million dollars

    3. Okay, you're making me feel bad since I didn't donate to charity but we're both taking big trips and paying off our mortgages. Good to know that we practice what we preach!
      My recent post If I Had A Million Dollars

      • Awesome trips are the way to go for sure! I'm a big believer in one memorable trip being more valuable than multiple small ones!
        My recent post Tips on Saving Money for the Future

    4. Wow, I've read several of these and you're the only one that paid taxes!
      My recent post Ask The Reader: What Is Considered “Well-Off” at 30?

    5. I love these type of posts, it's fun to dream huh. Ouch on the tax. :(

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