"Money went as quick as it came."
-Tupac "2Pac" Shakur
I'm tired as I arrive at the restaurant for work. It's 1998 and I get to work the morning shift today. This is a coveted shift. Even though we have to be at work by 7 am, we get done at 3 pm. The trade-off is worth it.
The kitchen manager, who I'll call Bobby, tells us that one of his relatives recently passed away and he inherited $100,000. This is a lot of money for restaurant workers in the Fargo, North Dakota area! I can't speak for my fellow cooks, but I'm jealous. I immediately calculated how long the money would last at my current pay rate of $20,000 per year. If I had $100,000, I could live for five years with the same amount as I make now.
Said another way, I would have blown the money. In my mind, I want to be a bum for five years. I don't really think about what happens after five years. I guess I'll have to get another job but I won't have any marketable skills. I would reward my self in the present, but at the expense of me in five years, and me in 10 years, and so on.
It turns out, putting a lot of money into my hands when I'm not prepared for it would be a bad idea. But certainly, others will do better.
Not Bobby. He had his money for a week and already spend 20% of it on a truck, wants to buy a house, and has grand plans of traveling with the rest of it.
There's something inherent about us that wants to use up all the money we have. This is the proverbial hole in the pocket. It's why our savings rates are so low. We are terrible at providing for our future selves.
Why is it that we tend to waste our windfalls?
Think of a financial windfall as an influx of money. This could be a one-time event or a large jump in income. Examples of a one-time influx include an inheritance, settlement, pension payout, sale of a business, or the proverbial lottery-winner (this is the least common because of the odds, but you hear a lot about what happens to the winners). Examples of a large jump in income would be a significant promotion, earning a contract in an entertainment industry (singing, acting, etc.) or sports industry (NFL, NBA, etc.).
There isn't a specific dollar amount that makes something a windfall. Everyone is different, so this is personal. The way to think about it is this - if the influx of money or income is more than what you're used to managing, then that would be considered a windfall. Another way to think about this is to ask whether the new money would change your life in some way.
The potential problem with being on the receiving end of a financial windfall is the difficulty in keeping the money. Around 70% of people receiving a windfall are back to where they started in a few years. You may have heard that many sports stars with huge contracts are broke within five years of leaving the game.
It's far too common that people receiving windfalls squander it. We get used to our "financial neighborhood," and a financial windfall pushes us to a new neighborhood. Windfalls often end up in the hands of those that are not prepared to deal with the consequences of moving to a new financial neighborhood. This is a result of their relationship with money and not the money itself.
Sometimes there are emotional reasons for this. Think about a person who feels survivor's guilt around receiving a life insurance settlement because her husband had to die in order to get it; or a person who feels shame because they now make a lot more than their friends and family members.
It's not always about negative emotion; sometimes it's about positive emotion. If you went from nothing to having a lot, it can feel like money has no limits. When you come from a situation where you had to make sure you always had money available before spending it, you didn't have to make a plan to have your money last. Getting a windfall feels like everything is now free because it seems like you don't have to worry about running out of money.
But you do have to worry about running out of money. More specifically, future you has to worry about running out of money. Without designing a life that incorporates both your needs and the needs of future you, you are effectively robbing your future self to live a carefree life today.
Why: Awareness of Money Scripts
You might be wondering why; why is it so common for people to blow through a windfall so quickly? Don't these people know they need to make their money last?
If people were 100% logical and rational, you could expect that. But, we're not rational creatures. When it comes to making decisions with our money, information isn't enough. We have to be able, willing, and ready to make a change.
A money script can be any belief, but they generally fall into four categories. Three of these categories can lead to our financial windfall squandering.
The first category is money avoidance. Money scripts that fall into this category are generally beliefs that money is bad. If you believe that money is bad, money corrupts, or that you can only have love or money, then coming into money is going to be uncomfortable and you have the potential to subconsciously come up with reasons to get rid of it. Those reasons will feel justified, but the underlying root is that you are uncomfortable having money.
The second category is money worship. Money scripts that fall into this category are beliefs that money will make your life better. Commonly, this includes the belief that