What to do when $10m drops into your lap …

I was asked the following question:

I’m 28 and just came into some money (8 figures). About 70% is invested in stocks and the rest is cash. I don’t want all the money tied up in stocks. Should I buy apartments or land and build my own apartments?

Now ” 8 figures” is a lot of money … somewhere between $10 million and $99 million; I imagine, more than enough to retire on for any of my readers.

I retired at 49 years old having made $7 million (in 7 years), and had no desire to continue growing my money.

In fact, there’s two things to consider:

1. You can retire very happily on $10 million, and

2. There’s very little likelihood that whatever set of circumstances took you to, say, $10 million will be repeated.

In other words, if you are lucky enough to cash out a life changing amount of money, it’s time to go into ‘lock down mode’ with your money …
So I told her that this was very much the position that I was in, with three key exceptions:

1. You are a lot younger (I was 49; you are much younger)

2. I put $6m cash into my house, you won’t be that stupid

3. I embarked on an active asset management strategy, when I should have aimed for passive much sooner.

This means that I own a house, some real-estate developments, a couple of businesses, and I invest in startups.

Whilst fun & interesting, sometimes, they do nothing to improve my standard of living (ie I already have enough), and mostly & unnecessarily increase stress.

Instead, this is the strategy that I am slowly putting in place now, and the one you should begin with.

a) Stocks are too volatile as a retirement portfolio.

You will suffer mentally when your portfolio drops 10% in a single day … then, keeps dropping. It’s fine when it’s sitting in your 401k & you can tell yourself: “it’s OK, the market always bounces back & I still have my job”.

I have a friend in a similar situation to you; he sold his business and keeps 100% in stocks: he has watched his net worth halve 2 or 3 times since he sold his company … he has not enjoyed that ride.

b) Property is the right place to keep the bulk of your portfolio; but buy to own 100%, live from the income; and, never plan on selling.

Sure property can also correct – Hawaii has been victim of that, more than once – but, in every correction, people still need somewhere to live and must pay rent. Since you are never planning on selling, however, the notional value of your property at any specific point in time becomes moot.

c) Here’s how to put it all together:

1. Keep your cash in place for now. Instead, move your stock market holdings into real-estate. How much you move, and how quickly you move it depends on how bullish you are on the stock market.

I would be comfortable with a max. of 20% or 30% of my net worth in stocks. At the moment, it’s much less, but I still have too many even riskier assets in my portfolio, so my opinion doesn’t count, here.

2. Start buying a balanced portfolio of smaller residential and commercial properties in prime, established areas. Avoid new areas & new (e.g. off the plan) properties. I always buy small, entire buildings (e.g. quadruplex apartment blocks; self-contained office buildings on own title; etc.). Look for current (e.g. modest rehab) and/or future upside potential to increase long-term returns.

3. If you are slightly aggressive, plan to partially-gear these (e.g. borrow up to 50%), so that you can optimize for number of properties owned. Try to make sure that each property is at least slightly cashflow positive, after expenses (incl. mortgage, taxes, repairs, vacancies, etc.).

As you get older, aim to move to 100% owned: no borrowings.

4. After you have become comfortable with owning one or two of these types of rental properties for at least a year or two, you can think about developing your own. This should increase your returns, as you get to keep the developer’s margin & there may be depreciation or other tax benefits.

Warning: developing property is very attractive and very lucrative. In theory.

In practice, it’s also very risky & the great source of my personal stress. When markets turn, developers go bankrupt.

So, here’s the secret:

Only develop real-estate that you can afford to keep.

That way, if you’re having fun and the market is strong, you can sell and do it all over again, but if the market is weak, you simply add the property to your rental portfolio & ride the market out.

5. Aim for a cash buffer of two year’s living expenses at all times.

Since you are young, your expenses do not reflect your likely future expenses. In that case, aim for $500k cash buffer (2 x $250k pa likely future expenses, when you have a family). Double every 20 years, to account for inflation.

Every year, or two, if you have an excess of cash in your buffer, buy – or build – another property. Do not put more money into stocks, unless you plan on keeping it there for 7 to 10 years … even (especially) if the market drops!

6. You will also need to have a plan to buy a proper house (use cash) one day; you could reduce your stock portfolio when the time comes, to further reduce volatility, since you will probably have a family by then and risk will be even more of an issue then, than it is (should be) today.

In all other respects, live like any other person of your age, spending – and living – no more than 20% more/better than your peers. Aspire & create in the same way they do.

Take chances & enjoy life in the knowledge that you have a secret safety net that you can rely on for when times get tough.

Do nothing, though, that could destroy that net, even if you think it might make you even richer in the long-term. That would not be an optimal Life  Decision.

The One Sign You Will Be Rich?

signLooking back on my last 14 or so years, I can tell you that this really is the one sign that you will be rich (according to a guy who runs a successful startup):

Have you thought about what foreshadows who will become truly rich? It’s remarkable how clear the one sign really is when you think about it.

“There are many types of rich — and I am talking about both external and internal rewards. Being rich is about having an abundance of what matters to you most.”

Money and happiness, although complex, are linked says economist Justin Wolfers. Obviously, there are many ways to measure wealth — whether it’s having a $250,000+ salary, volunteering the most time at the local animal shelter, or having the most playtime with your children. Whatever you value, you are rich if you have an abundance of it.

Whilst I agree that ‘rich’ can be measured many different ways – not just in monetary terms – in this blog, I am ONLY talking about getting rich in traditional, monetary terms … in fact, this blog is about reaching at least $7million in 7 years.

So, what is the ONE, sure sign that you – or somebody you know – is likely to become $7million in 7 years kind of rich?

So, here is what I believe predicts who will be rich.

The one sign you will be rich is that you work harder than everyone else.

Whether your riches are measured in friendships, fitness, talent, or money, those who have an abundance, get it by working harder to secure it.

There is often a backlash against working hard to secure wealth — some may call you a workaholic or a perfectionist. Some may despise your inability to set “work/life” boundaries. And others may still wonder when you will take a “real” vacation. But there is no other way to be great and fully rewarded.

“Don’t let the skeptics fool you, winners just work harder than others think is possible (or want to themselves).”

But it’s not a winner-take-all equation — we all want different kinds of wealth. But those who do work harder are rewarded proportionally.

So, work harder, and enjoy your proportional benefits … after all, you will deserve it 🙂

Advice for a new multimillionaire …

shoppingI realized that I’ve been talking a lot on this post how to become a multimillionaire, but I haven’t talked a lot about what to do when you get there!

Let me rectify that right now: for my first example, take this young (and, new) multimillionaire:

What advice can you give me, as a new 32-year-old multimillionaire, that you wish you had known at that age?

Firstly, I told her, don’t overestimate your wealth …

Spectrum (a Chicago-based consultancy that specializes in understanding the High Net Worth individual and family) surveyed a number of people whose net worth was in the $1m, $5mill, and $25m+ ranges about how much money that they would need in order to feel wealthy.

Almost invariably, the answer was: “about double”.

Having lived through the ups and downs of wealth, I think I understand the reason: wealthy people spend capital. What they should be spending is income.

That’s another way of saying that it’s very easy to live beyond your means no matter how much money you have.

Here’s how to control your wealth:

1. Take your capital and divide it by 20. That’s roughly how much you have a year to live off (if you’re going to live on bonds and savings, well, divide by 40 instead).

2. Invest 95% of the capital as though it’s the last money that you will ever see (because, it most likely is).

3. Be Rent Wealthy, not Buy Wealthy. Rent Wealthy means that you rent what you need: want to holiday in Aspen? Rent a villa … but do not, under any circumstances, buy one. Want to travel? Go First Class but do no buy the plane!

[Note my rule on personal ‘capital purchases’ (eg houses, cars, boats, etc.): only buy something when it makes absolutely no sense not to]

4. How you invest your money during Life After Work (a.k.a. early retirement) is VERY different to how you might invest your money while you’re still trying to build your fortune:

– Pre-retirement investments include: businesses, francises, property development, share trading, and so on.

– Post-retirement investments include: TIPS (inflation-protected bonds); dividend stocks; 100% owned commercial real-estate, and so on.

Not many people can make the mental switch from high-flying entrepreneur/investor/big-wig to conservative investor … in order to survive post ‘Your Big Windfall Event’ you’re going to have to make the switch.

A 10 minute primer on how to get rich?

primerOn Quora, somebody asked for “something I can learn in 10 minutes that will make me rich?”

The obvious answer is: “not much”.

But …

… this is my blog, and I’m up for a challenge.

In fact, I think you can learn pretty much everything that you need to learn about getting rich in just 10 minutes.

Unfortunately for me, if I’m right, you’ll know everything you need to know in just this one post, so you’ll have no need to keep reading …

… and, if I’m wrong then you’ll simply delete your bookmark to this blog, as it will prove I can no longer deliver.

It appears that I lose either way 😉

Even if this puts this blog out of business, I’m willing to take the 10 Minute Challenge because it also puts every other best-selling ‘get rich’ spruiker – and, let’s face it, most of them are crooks – out of business, as well.

And, that’s worth the sacrifice …

So, here goes:

I think the number one thing that you can learn in 10 minutes is: “what is your Number?” … in other words, how much is ‘rich’ for you?

For example, think about how much annual income you would need (start with $250k p.a. and work your way upwards) and multiply that number by 20.

[AJC: the question was about “rich”, so the answer needs to be $5m to $10m++ … but, this exercise is still valid even if your Number is based on 20 times $50k or $100k]

Once you have that Number in your head, think about how long you are prepared to wait before becoming ‘rich’ (if you are prepared to wait more than 5 to 10 years, surely you can give this exercise longer than 10 minutes)?

Once you have those two numbers, a few minutes playing with this Compound Annual Growth Rate calculator will tell you what % return you need on your investments each year, over that time frame.

Finally, 30 seconds with this chart will tell you everything that you need to know about how you can get rich, which was your original question:

[Source: Seven Years to Seven Figures: The Fast-Track Plan to Becoming a Millionaire (Agora Series): Michael Masterson: 9780471786757: Amazon.com: Books]

Now, as promised, this really is everything you need to know in order to become rich …

… but, I’m not worried about losing readers, because – now that you know what to do – you’ll want to bookmark this page so that you can keep reading to learn how to do it 😉

But, I’m not smart enough to be rich!

Firstly, let me warn you: this post will have absolutely no bearing on how wealthy you will become!

Now, do you need to be smart to become wealthy? Is “but, I’m not very smart” a valid excuse for not even trying?

It turns out that the answer to both questions is NO.

You see, your IQ (more correct: your cognitive ability – i.e. your ‘smarts’) has very little to do with how wealthy you will become …

… studies have shown that 97.5% of the factors that can explain wealth have nothing to do with how smart you are:

Zagorsky found a correlation of 0.30 between IQ and (recent annual) income, which is relatively low — roughly 9% of the variance in income can be accounted for by IQ, and the other 91% is due to ‘other factors’. On average, he found that each IQ point added about $200 to $600 in annual income. As for net worth, the correlation with IQ was even lower, at 0.16, meaning an explanatory power of about 2.5% (leaving 97.5% of the variance to be explained by non-IQ factors). In his words, “Since the statistical results are not distinguishable from zero, this suggests IQ test scores and net worth are not connected.” You can view a scatter plot of net worth vs. IQ here: http://www.flickr.com/photos/pke…


the non-relationship between financial worth and iq

from the journal intelligence

He also dives into about 30 other variables with interesting outcomes. For example, your net worth at age 28 has only a slight correlation of 0.13 with your net worth at 33-41. Self esteem has a correlation of 0.11 with net worth. Being US-born (as opposed to being an immigrant) has a correlation of negative 0.01 with net worth, while having siblings has a net worth correlation of -0.06; but don’t worry, those aren’t significantly different from zero either.

Ironically, you will need a reasonably high IQ just to understand what this is all telling you, so let me simply remind you of a story that I shared some time back:

I bumped into a friend of mine, who was voted “least likely to succeed” at high school. I was surprised to see him stepping out of a shiny, new, red Ferrari.

After we exchanged pleasantries, I congratulated him on his success, told him that I wrote about personal finance, and asked him how he made his money.

He said that he simply bought and sold stuff on a 3% margin, and that’s been enough to fund an amazing lifestyle and a huge real-estate portfolio to underpin his retirement.

Well, I was incredulous … only a 3% margin?! And, I told him so.

But, no, he said: “I really do work on a 3% margin: I buy stuff for $1 and sell it for $3. That’s 3%!”

As I said, whether or not this post makes any sense to you whatsoever, it will have absolutely no bearing on how wealthy you will become … thank goodness 😉

Personal Finance = Emotive Finance

How many of you can honestly … and, I mean honestly … say that you are totally rational about money, and your personal relationship with it?

If that’s you, think again …

All financial decisions are made emotionally, then justified rationally later.

Of course, there will be a very few, clinical souls out there who are able to be totally rational about their personal finances: they read all the (good) books and blogs; they follow the experts; they max their 401k’s (at least to take full advantage of the company match); they examine investment classes and returns; and, they (generally) make sound investments.

But, they will never be rich.

Here’s why: in order to become rich, you need to drive your required annual compound growth rate sky high.

That takes passion … the kind of passion that drives massive action … and, it’s the massive action that will eventually lead to outstanding results.

But, passion is fueled by base emotion.

And, the two most powerful emotions – when it comes to money – are:

Fear and Greed.

I think, by far, the most useful of these two emotions is Fear.

You see, Greed will drive you to take speculative risks that may (highly unlikely) make you rich, or may (likely) send you broke. Even if you fail, Greed will make you try and try again, until you become rich …

or, you keep on failing until we simply never hear from you again.

But, Fear is the slow burn.

It drives some of us to:

– Create emergency funds: because we fear that we’ll run out of money

– Diversify: because we fear the market will tank

– Pay Off Debt: because … well … just because!

– Max our 401k’s: because we’re scared of retirement

– Live Frugally: because we’re simply too scared to spend money

Unfortunately, these tactics simply pander to your fear …

The irony is that these are the exact same financial mistakes that will – for most of us – bring about the outcome that we most fear: lack of financial security.

But, Fear also drives a fortunate few  of us to succeed, because we fear:

– That we won’t be financially secure

– That we will have to work for the next 40 years in a job that we will grow to hate

– That we will be overtaken by others

– and, so on …

So, we use that powerful emotion to push us well and truly out of our ‘comfort zone’ and help drive us to the only rational solution available: making the short term sacrifices, and taking the short-term (but, calculated) risks, that will ensure that we never have to worry about money again.

Still, if you discuss your wealth – or, desire for wealth – with most people, they will assume it’s Greed that drives you; typical is Kevin’s (@ Ask For Benefits) response:

Even 7 million is not enough if you allow your net worth and lifestyle to become your idol. At 7 million you begin to think, “if only I had 8, then I would be happy”.

True, for the person driven by money and Greed, $7 million won’t be enough … and, neither will $8 million. They’ll keep going and going until something stops them.

But, for the person driven by Fear – like me – we stop exactly when we have what we set out to get. And, that amount has been carefully calculated in advance to match exactly what we need for a financially safe, and fulfilling life.

No more, no less will do …


How do I multiply my money?

This is quite typical of the questions that I am asked:

How do I turn $20k, to $50k, to $100k, to $300k, to $1m etc. through the process of investment in different markets and/or general investing whether it be in an idea, or business.

Who could argue with a nice, smooth progression like this? 😉

However, our reader is missing two things in her question: 1. time frame and 2. an objective.

With the “etc.” on the end and the jumps of 2x to 3x between the values in this series, I am assuming that her plan is to keep going past $1 million to $3 million and then to $10 million (or more).

Also, I will assume that she plans to take 2 years for each ‘jump’ i.e. from $20k to $50k, $50k to $100k, $100k to $300k, and $300k to $1million … an 8 year period in total.

A few minutes with an online compound growth rate calculator (http://www.investopedia.com/calc… ) will show her that she needs a 63% annual return from her ‘investments’.

Shooting for $10 million in 12 years increases the required return to 68% and stretching her time frame to 3 years between ‘jumps’ reduces her required return to a ‘more manageable’ 40% annual return.

Now, what to invest in for that kind of return?

The reason for the higher returns as you work your way down the table is: higher risk + more hands on + leverage of time (using Other People’s Time) + leverage of money (using Other People’s Money).

No ‘passive’ investments allowed …

Who ever said it was going to be easy?!

How does being rich change your life?

Buying islands aside, how does being rich change your life?

Paul Graham, not depicted in the photo to the left, the founder of Y Combinator [AJC: the incubator for famous internet startups such as Drop Box and AirBnB …. if you have to ask what these are, you are over 30] says this (when asked “how did your life change after FU money?”):

There are some things that change. For example, you learn to distinguish problems that can be solved with money from those that can’t. You can buy your way out of a lot of schleps.

Life doesn’t get an order of magnitude more enjoyable, because you still can’t buy your way out of the most serious types of problems, but a lot of annoyances are removed.

The best part is what I thought would be the best part: not having to worry about money. Before Viaweb I’d been living pretty hand to mouth, doing occasional consulting. It felt like treading water, in the sense that while it wasn’t hard, I knew in the back of my mind that I’d drown if I stopped. Getting rich felt like reaching the shore.

One thing you learn when you get rich, though, is how few of your problems were caused by not being rich. When you can do whatever you want, you get a variant of the terror induced by the proverbial blank page. There are a lot of people who think the thing stopping them from writing that great novel they plan to write is the fact that their job takes up all their time. In fact what’s stopping 99% of them is that writing novels is hard. When the job goes away, they see how hard.

I can relate to this on a number of levels:

Firstly, you can buy yourself out of what Paul calls “schlepps” and what I will simply call “annoyances”.

The pool dirty? Call The Pool Guy.

Something broken around the house? Call the handyman.

Can’t be bothered cooking? Eat out … expensively. In fact, never eat a cheap steak again.

But, you can’t solve personal problems (of the really personal kind) or health problems with money … you, of course, can afford to treat them a little (or a lot) quicker/better than before.

But, what I’ve found is that your major problems become about money: how to stop losing it; how to make it last; how not to be cheated out of it; how to invest it … and, so on.

I’m not not sure if there’s a bigger Number, where even some of these problems go away …

… if there is, I’m guessing it’s well-north of $10m.

I can sympathize with Paul on the book thing: it’s hard to write and publish one. Just ask Debbie, my coauthor [AJC: ours is finally coming out … soon].

But, the question remains: what exactly is FU money?

Well, a LOT more than you think!

Here’s what David S Rose, a well-known ‘super’ angel investor in Silicon Valley, says:

Being a millionaire ain’t what it used to be :-).

In thinking about net worth, it’s helpful to consider everything using a common denominator, such as your potential annual income based on the return that the wealth could theoretically generate. (Because otherwise, if you start spending your principal, you won’t be a millionaire very long.)

So, for example, a million dollars put into the safest CD you could find, might, if you were lucky, generate 1.5% interest each year… which is $15,000!

Even if you had, say, $5 million, and were willing to take a fair bit of risk and put it all in the stock market where it might (with real luck) generate 4% annually, you’d still be making “only” $200,000 a year. Take out taxes (being generous, let’s use the 20% rate at which Obama paid) and you’re at $160k.

That’s enough to rent a nice apartment (or pay the mortgage on, say, a +/-$1m house), take a nice vacation each year, and probably pay private school tuition for one or two kids… but you’re certainly not going to be flying your own Gulfstream with only $5 million.

Next, if we skip over the run-of-the-mill deca-millionaires and jump to someone with $100 million in assets, NOW for the first time are we just getting to the point where you have a good bit of flexibility.

Assume that with this kind of cash you begin to have access to some good hedge and venture funds, so maybe you’ll be able to consistently get 8% on your money. And now that you’re in the privileged class, we’ll figure you can match Mitt Romney’s 13% tax rate. This means you’ll net out to about $7 million disposable income annually.

At this level you can do pretty much anything you’d reasonably want. Pay the mortgage on a $10m mansion as well as a $5m summer place in the Hamptons, put four kids through Ivy League colleges, fly first class anywhere you’d like, make half a dozen angel investments at $250K each, eat out every night at five star restaurants, vacation on the Riviera, and have a full-time cook, butler, nanny and chauffeur. I expect you’d even tithe $1m annually to good causes, which probably gets you named Man of the Year for a big local charity.

All in all, not a bad place to be! But still no Gulfstream, no $35 million penthouse in midtown Manhattan, no building named after you at your alma mater, no mega-yacht docked outside your Riviera estate, no getting Justin Bieber for your daughter’s quinceanera, no 24/7 security detail like the President, no executive-producer credit on Avengers 2, no invitation to the Allen & Co retreat, no mega-trophy-spouse.

All that needs to wait until you get your first billion and put it to work.

Here we’ll assume that with enough portfolio diversification you’ll finally hit a Google or LinkedIn, and be able to comfortably plan on >10% annual returns from your professionally-managed holdings. And since you’re now an oligarch, let’s say that your hardworking gnomes will figure out how you can limit your taxes to the same <10% that will likely surface once Mitt releases his older returns.

This means you’ll now have close to $100 million a year after taxes, and FINALLY you can afford all those things you’ve always dreamed of! While you might not be able to pull off in the same year BOTH the $85 million pièd a terre in Manhattan that Russian guy bought for his daughter, AND the $150 million megayacht of the Sultan of Dubai, you’ll be in pretty good shape.

However, those constraints DO make a difference when you’re playing in the big leagues, so figure that you’ll have to step up to the next category, before there really are NO practical limits to what you can do and how you can live.

Once you get above the $10 billion level, all is good, and you can both help change the world (viz. Bill Gates) AND indulge yourself in any way you desire (viz. Larry Ellison and various sultans). From this point on, it’s simply a matter of score-keeping in the great Monopoly Game of Life. You’ll need to decide for yourself how important your place on the Forbes list is, and whether you care about your standing relative to Mark Zuckerberg ($10 billion), Michael Bloomberg ($22 billion), David Koch ($25 billion) or Warren Buffett ($44 billion).

Some of David’s points are spot-on: for example, retiring today with $1m nets you $15k (to $40k, in case you’d rather believe the financial planners who advocate a 4% ‘safe’ withdrawal rate than David) …

… retiring in 20 years with $1m is poverty level (roughly halve whatever number you believed, above, because of the eroding effect of inflation).

And, I can’t talk about anything more than $7m.

But, at that level, I can certainly agree with David that it buys me a (very) nice house and I certainly can afford to “take a nice vacation [or two] each year, and [definitely] pay private school tuition for one or two kids”.

But, is that FU money?

I certainly don’t feel that way …

… I still have ‘money worries’ of the kinds that I listed, above.

But that just may be the syndrome that Spectrum (a Chicago-based consultancy that specializes in understanding the High Net Worth individual and family) found when they surveyed a number of people whose net worth was in the $1m, $5mill, and $25m+ ranges about how much money that they would need in order to feel wealthy.

Almost invariably, the answer was: “about double”.

Hmmm …. 😉



How rich do you need to be before you can buy an island?

Normally, I avoid answering questions outside of my personal experience, so you should be able to surmise that you need more than $7 million before it makes sense to buy your own slice of paradise.

Instead, I feel that a little logic and a minute or two with a calculator will allow us to come up with a reasonable estimate:

First, let’s take a look at how much an island will set you back …

… I’m not talking something that Richard Branson might buy; perhaps something like Blue Heaven Island in Bora Bora, which will ‘only’ set you back a tropical $4,990,000!

But, buying an island is not as simple as having $5m; take it from Mike, who says:

When you are in the middle of the ocean, separated from the nearest stores, schools, and hospitals, the price can reflect that. Also, to get to and from your island requires an expensive boat.

Wise words; maybe ‘Mike’ has bought an island or two, in his time?

So, it seems, to be able to buy a “decent island” you need to have enough net wealth to cover:

1. The cost of the island

2. It’s annual running costs

3. The cost of your own home

4. Your own annual (non-island) living costs

There’s no way to answer these questions accurately without making a whole host of assumptions, but I’ll take a stab, anyway:

i) If an island costs $5m, then the annual running costs should be estimated at between 10% and 20% of the purchase price. This is purely an educated guess. Let’s say $750k p.a.

ii) If you own a $5m island, I’m guessing that your own home/s will cost the same, let’s say another $5m

iii) If you can afford a $5m home and island, I would estimate that your minimum annual living costs will be another $500k – $1m p.a. Let’s say another $750k p.a.

Applying our Rule of 20 (i.e. you can retire when you have about 20 times your required annual living expenses in the bank) you will need ($750k + $750k) x 20 = $30 mill. (PLUS: $10m for the purchase price of your island plus your home/s).

There you have it:

I think you need at least $40m net worth before even considering buying a ‘cheap’ island.

I won’t be buying an island anytime soon, how about you?

How to become a wealthy doctor?

We all have this image of doctors. We believe that that they are all-knowing and well … rich.

But, is that really the case? Let’s check out what this young doctor (a new reader), David, has to say:

I am a young physician (early 30s) making approximately 800k per year. After expenses and taxes, I am left with ~300k to save/invest. However, I have been making ~40k for the majority of my working life and am completely overwhelmed as to how to handle this chunk of change (unfortunately I received no financial education in medical school…). Do you have any advice as to how and where I should allocate this money? I am worried about investing too much money in one source and would like to be fairly diversified.

You see, right here is where doctors go wrong!

Firstly, $120k – $250k net spending money p.a. [AJC: my estimate, depending on how the taxes and other expenses work out] is, indeed, quite a large “chunk of change” …

… especially when jumping from $40k starting salary.

So, the first mistake that most people in this situation make is to immediately increase their standard of living. Now, a conservative person won’t increase their living standard to $120k less 10% (because that’s what the books tell you that you should ‘pay yourself first’), but the chances are that they will raise their living standard quite dramatically.

The $40k quickly becomes $60k as they equip themselves with a new car and some extra furniture and a larger TV or two … then $85k as they move into a bigger apartment (with a view) … then $120k as they step into a more committed relationship and buy the house, school the kids, and so on.

In other words, the treadmill has a way of increasing its speed until you forget that you are supposed to be ‘rich’.

You see, David’s sudden increase in income comes under the heading of ‘found money’; I’ll post on it soon …

… actually, read it in reverse order (i.e. read the second article first).
Then, you can tell me what you think David should do?