What If Money Fell Into Your Lap?

August 21, 2015

In a story that may or may not eventually turn out to be true, two men claim to have found a train that allegedly vanished at the end of the Nazi regime and it was (in theory) loaded with valuables. They are offering to share that location with authorities if they are given 10% of the value.  There are all kinds of legal, ethical and moral questions that would surround a found former Nazi treasure trove should this train actually exist and should they be given a nice finder’s fee. That could, if it’s a whole train filled with valuables, be quite the fortune! What are they going to do with it?

What would you do with it? Any time there is a Mega Millions lottery jackpot that is a few hundred million dollars, I spend a whole dollar and buy a ticket. (Yep, I’m a reckless gambler!) When I have that magical $1 ticket in my hand, I let my mind wander and begin to think about what I would do if my ticket is a winner.

That same concept, although in a smaller proportion, was the subject of a conversation I had recently with an employee. The employee and her husband both work at the same company and have three older children.  The last of the kids had just finished college and they were trying to figure out how to prepare for retirement.

The first time we met, they were concerned about if they were ever going to be able to retire given the debt load that they had. Their house, which once was nearly paid off, has a large home equity line of credit against it. They used that to fund much of their kids’ education. They also had some Parent PLUS loans outstanding, some credit card debt and two car loans. Finally,  they had taken large loans from their 401k’s and had cut contributions back to be able to handle the debt and the education costs.

We mapped out a plan that started with their credit card debt being paid off first. It was going to be a long slow climb out of debt, but they would have gotten there or close to it if they worked another 15 years. That would have taken them into their late 60’s and they weren’t sure that they would be able to make it that long. They thought they would either be too stressed or they would be caught up in a downsizing before then. I asked them to look at their budget and see what could be reduced or if there were another source of income they could generate.

When they came in for a subsequent meeting, they looked very tense and uneasy. I thought something was wrong and I was partially correct. What was wrong was that they were grieving the loss of her parents. Within weeks, both of her parents died and they were struggling to deal with that.

What that meant financially, though, was something entirely different. Her parents were frugal throughout their lives and never really vacationed so she thought they were struggling financially. Unbeknownst to her, mom and dad had amassed nearly $2,000,000 in assets. As one of four children, she was in line for a half million dollar inheritance. Their question was whether they should invest this newfound wealth or pay down some of their debts.

We looked at the interest rates on their debt, the monthly payments, and their investment risk tolerance and talked through the pros and cons of investing and the pros and cons of paying down debt. For investing, they had a relatively low risk tolerance. 2008’s market crash scared them and they didn’t want to experience anything like that again so their expected return on investment was going to be rather low. We looked at the pros of paying down debt and for most of their debts, the return on paying it off was going to be higher (because of interest rates) than the expected return on their hypothetical investments. With the debt paid off, their monthly cash outflow for payments would be greatly reduced as well.

What did they do? They ended up paying off every penny of debt. For them, getting to a place of zero debt provided amazing “sleep at night” protection and they viewed that as incredibly important. With the added cash flow, they increased their 401k contributions to the maximum $24,000/year ($18,000 in regular contributions plus $6,000/year in catch up contributions) and started a substantial monthly savings plan with their local bank. With the reduced debt burdens, they would be able to build a large asset base in relatively short order with no other demands on their incomes.

If money “fell from the sky” and landed in your lap, what would you do?  How would you evaluate your options? Add comments below or on our Facebook page if you or someone you know has had to wrestle with this type of issue.