The other day there was an interesting question on Twitter. How much money would it take to be life-changing? Unfortunately, I did not get a chance to formally answer this in the thread. I did, however, get a real-world opportunity to test my answer a few days later. In the process, I also answered the age-old question, what to do with a windfall lump sum.
Life-changing Windfall Amounts Depend On Stage of Life
As I read through the answers to the thread I noted the values for those just starting their party to Financial Independence (FI) were quite small. Often it was enough to have an emergency fund. Those that were later on the road or at FI, like ourselves, answered with much larger numbers.
A Windfall that Makes US Financially Independent Would Not Change Our Lives
Our own answer based on gut feel of that thread waffled somewhere between 1 and 2 million dollars. Why? Another million and we would be at our planned retirement number. Significant in concept at least. But honestly, I still intend to work until 55. So would I actually change my lifestyle if I hit our retirement number early? Probably not. So at least in general 1 million is significant but I guess it is not life-changing for us.
A Financial Windfall that Exceeds FI Would Change Our Lives
But still, there has to be a number that would cause something drastic to change in our life. What about 2 Million? Combined with our current assets and growth rate this number would exceed our retirement number today by 1 million. What would that mean? Well, here is where things get interesting.
I still wouldn’t retire if I had 1 million past our retirement number. But, a million dollars past our number would be a significant chunk of change. But even more so that million extrapolated out to 55 with our current growth and contribution rates would be well beyond any amount we could spend in retirement.
The basic value of money to us would change, savings would be devalued in favor of further philanthropy and spending. Now we wouldn’t go hog wild obviously, as I’ve observed what happens to professional athletes with easy money. But a million dollars over our retirement number now would fundamentally change our relationship with money over the long term. By definition, it would be life-changing.
Our Recent Financial Windfall: Found Paper Savings Bonds
Anyway, if you are still reading you are probably wondering about our real-world example. No, I didn’t win the lottery or inherit a life-altering amount of money based on the above definition. Instead, my wife discovered some old paper I savings bonds long since forgotten in a safety deposit box. The value of these bonds approached half a year of savings for us, or 1 full year of expenses.
Managing Our Financial Windfall
The amount of these bonds exceeded the responses of many folks to that Twitter thread. So how did I respond? How do we handle a lump sum windfall?
Determining Windfall Value
Well, the first thing I did was to determine the value of these bonds and their maturity date. The bonds are mostly about 15 years old, so they still have another decade and a half to maturity. This means their value is near twice their face value. It also means they are earning a significantly higher interest rate than today’s bonds. I determined that value and rate of return by using the treasury savings bond value calculator here.
Should You Keep the Assets In-kind or Convert It?
Given the higher rate of return of these I-bonds compared to today these specific funds will not be touched. Any time you receive a windfall you should consider if that specific instrument makes sense to reallocate. Something like an I-bond or an existing tax-advantaged account probably makes sense to keep intact even if you intend to spend the funds. Rules for reallocation, your asset allocation, and future growth vary by financial instrument so be sure to research. In general though, money is fungible so you can still just spend the funds via other instruments you have on hand if keeping the existing instrument is optimal. So the real measure for me with such a windfall is how I manage a similar amount of funds out of our existing savings rate. A windfall in a retained investment like these i-bonds potentially frees up some of our yearly savings money for equivalent usage.
What Did We Do with Our Recent Financial Windfall?
So what have we decided to do with a sudden windfall equal to half our savings rate? Well, we decided to save all but a small amount of it. I know boring, right? Honestly, We really don’t have anything we are itching to buy. We are doing some home remodeling and have some upcoming travel but honestly, these are already budgeted. We have no fundamental need or desire to increase those budgets as we are already getting what we want. Which brings us to point 2. Don’t just spend a windfall because it’s there. Spending a windfall or lump sum is fine, (provided your financial house is in order) but only if you actually have something you want.
Gifting Some Funds to Our Sons
So what of the small amount of funds we indicated above will no longer save as a result of this windfall? Honestly, it’s not much, we will reduce our savings rate for the year by about 2%. That amount is not even statistically significant when compared to a daily movement in the stock markets impact on our net worth. We won’t be spending that 2% either. Instead, I intend to gift it to our sons.
Lifechanging and Beneficial are Different Questions: Taking Advantage of a Nudge
Our kids both have savings accounts. I have been meaning for a while to top these up enough to open custodial brokerage accounts for each of them and invest their funds in index funds. This was something already in the plan for the next few years. The windfall just gave me the nudge to do it already. Which brings me to the final point. A windfall doesn’t have to be life-changing to be beneficial. A nudge to change your behavior can still be positive. Take advantage of found money to motivate you to do things you have otherwise procrastinated.
Have you ever had a significant financial windfall? How significant would a financial windfall need to be to change your life? What would you do with those lump-sum funds?