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What should you do when you strike it rich? – 7 ways to benefit from windfalls, bonuses, and other ‘found’ money!

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pennys from heavenTonight’s episode of Seinfeld was a rerun from the mid-90s when Jerry receives a large check (so large that Kramer is surprised) for his performance . It’s only part one of a two-parter. But it got me wondering about what most people do when they receive a windfall. Management of your new found resources can be a problem; and it’s a problem that I share with those who get annual bonuses or special rewards, prizes, unexpected windfalls, inheritances, etc..

It’s easy to start planning what you are going to do with the money and quickly you forget how hard it was to come by, or how long you had to wait. In Seinfeld, Jerry decides to go and buy a brand-new Cadillac for his father with the money; he doesn’t even think about other options because he feels ‘rich’. Isn’t it interesting how such income can totally shape your perception of being ‘rich’?

For those of you who have been following my progress this past year, you will have realized that I have begun to accumulate something of a cash position: currently about $7,139.05 worth actually. Of course, this is the gross amount and there have been a number of deductions from the amount for various expenses including taxes, fees, hosting, equipment purchases, etc.. So the total amount isn’t exactly that much. I didn’t keep an exact tracking of the costs either, though from January 1st, I already promised to do that.

To make matters more confusing, some of the earnings are in US$ while others have been paid in the local currency here. And the money resides in several different places as well: my broker accounts, paypal accounts, and several different bank accounts. Rather than splurge on dual 24″ monitors (though I drool), I’ve taken a very much wait-and-see attitude. I’ve been slowly consolidating the money in several places only, and evaluating options for generating additional revenue.

Currently I’m considering five different ways I could spend the money, and I’ll suggest some others that I have already ruled out.

1. Stashing it in the bank: if the amount isn’t large, and the outlook is uncertain (as it is here in Taiwan, with several major elections coming, rising oil/gold prices along with jumping interest rates, it can be quite a good choice to park money in the bank for the short term. The disadvantage is that the money actually loses value as governments tend to devalue currency over the long term via interest rates that don’t keep up with rising prices (and prices are rising F-A-S-T in many parts of the world for many products).

Verdict: For smallish amounts, it’s about the only thing to do other than spend it. I’ve definitely done this.

2. A Term Deposit: A typical bank account pays a pitiful amount of interest: in Taiwan it’s about 1/4% per annum for a standard bank account. This devalues your coin faster than you can say ‘Shinkansen Bullet Train’. Parking it in some fixed term CDs or ‘term deposits’ may be a better choice: rates are approximately 2% (yes, 2%) higher and edging up gradually as inflation is rising. With a choice of fixed rates vs. floating rates, it’s always wise in an rising interest rate environment to choose floating rates to benefit from rises. I noted that today in the bank the fixed rate vs. floating rate term deposits didn’t vary for periods longer than 12 months. Wonder what that means…

Verdict: For largish amounts, it may be worthwhile for longer terms, but don’t park it too long. I’ve also done this.

3. Money market accounts have similar benefits to bank accounts, and indeed, with TDAmeritrade I’ve parked some of the capital in their money market account, which accrues a smallish interest amount every month until the money is enough to do something with. Of course, you need to check WHICH money market account offers the best and most secure deals. (See what a money market account is ).

Verdict: A good way to earn interest payments from your broker, but has its limitations and some risks. I’m doing this right now.

4. Dividend Investing: For a little more risk, though, I’ve been looking at purchasing stocks with Dividends. I’ve always been attracted to these because they are an additional way to earn money from the total stock return ever since my days as a Motley Fool member. Of course, the question of tax efficiency creeps in, it may not be a good choice for everyone. But as part of a general stock portfolio: the triple whammy of capital growth, share re-purchasing, and dividend increases is QUITE attractive. There is the big danger though that you will LOSE money in the short to long term, if you take unforeseen risks or the proverbial s**t hits the fan for the companies in your portfolio.

Verdict: Definitely more potential for earning a profit, but risks are similarly higher. Not for the faint hearted! I’ve done this for quite a long time, with varying degrees of success.

5. Investing in your business: for businesses that are expanding, capital can become scarce at times. Even our business which has been around in various guises for 7 years, sometimes needs capital to furnish expansion. We’ve been lucky as our business really is a light business – it’s service-based – so most of its non-startup capital requirements were funded by its ongoing revenue. But it’s not hard to imagine us needing money for moving to larger premises or purchasing or setting up a branch school in a nearby locale.

Verdict: Much more risk than #5, but the benefits of expanding your profits from your business can be exponential. Of course, the failure rate of new business is high. Done it once or twice.

6. Lending Money: there are a variety of methods now in which small lenders can take on private loans as individuals or syndicates through Zopa (in the UK/US), Prosper, etc.. At the moment, I’m prevented by my residence status from being able to open such accounts, but if I were relocating to either of these countries, this is one avenue I would actively pursue to create additional income. Zopa has tiers of credit markets that would allow you to spread your risk over different types of loans, and perhaps earn interest above that paid by the bank for little extra risk.

Verdict: I’d love to do this, but I’m not legally able to yet. I’ve done lending on Kiva but that’s for a totally different reason. Done it privately both successfully and not .

7. Purchasing websites: There are many quality websites, blogs and forums available on different auction sites including SitePoint and Digital Forums that offer additional options for creating additional streams of revenue. Purchasing an active and reputable website with established revenue streams (from text ads, linking, etc..) could be a risky but exciting way to increase the returns on your investment. I had actively considered purchasing one website BobMeetsWorld when that came up for sale recently. While the actual revenue was under-optimized, it was a PR5 blog that was selling for a good price. Of course, with this active blog already, I’d have been hard pressed to find the time to write challenging content.

Verdict: I’ve considered this, but the risk is considerable. Many auctions are fraught with fraudulent information and listings, esp. as sellers try to justify the higher prices for their websites. It’s even more difficult to verify the reality unless you actually know the website and the website owner. I’ve never done this.

My own decisions: It’s all personal!

I am now preferring to invest whatever money I have to create revenue, whether it is from bank accounts, loans, stocks, websites, etc.. I’m very much concerned that too much of the retail investment market is focused on gains for tomorrow that may or may never appear, and too many employees are invested heavily in stocks, funds, pension schemes that are promising rates of return that are not feasible. So I’m focused on earning income from non-work activities right now so that I will have the skill, knowledge, and income to support a much bigger program of income generation.

In reality, what have I done with the extra income so far? About $2,300 is in a money market account, earning a little interest in my broker’s account. I have been planning to invest this money by buying some Dogs of the Dow stocks to get a better return. And there are some good value stocks that have been beaten down sorely by the current problems in the property market, including Citibank and JPM. The current dogs are Citigroup; Pfizer; General Motors; Altria; Verizon; AT&T; DuPont; JP Morgan Chase; General Electric; and Home Depot .

Some more money is now being turned into a ‘term deposit’ with a term of one year based on a floating rate with current interest rates of about 2.33% for 12 months. Some of the remaining 20% will be kept in a cash position to finance growth and expenses for the website: including finding opportunities to expand my online empire! I’ll let you know how I fare.

Tell me what you did with your bonuses! I haven’t got mine yet… Chinese New Year is coming soonish! Let me know what you did! I’d be delighted to know.

Are you a credit card slave? Part 4

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In this series, I’m looking at our changing attitudes to money, and answer the simple question: are we all credit card slaves now? Part 1 was entitled Where did our attitudes to money come from?. Part 2 is Credit Cards, Bank Accounts and Salaries. Part 3 was The Credit Card Cascade and the Madness of Spending. This is the fourth installment in this week’s series.

What is a credit card slave?

In Taiwan, a few years ago, many banks started promoting a new form of credit loan that was a cross between a credit card and a traditional bank loan. After being approved, consumers were issued with ATM cards that could be used to withdraw cash at machines around the world; of course, the ATMs attracted fees, and the interest rates were high. Slowly, the banks pitches become more and more aggressive and the advertisements more and more outrageous. One bank called in Chinese ‘Wan Tai Bank’ or Cosmos Bank ran such a successful ad campaign that they become almost a household name in Taiwan. The cards were called George and Mary…

g&m

But many borrowers were unable to pay back the loans they had made, and the interest rates (now regulated) stood at more than 18% apr. Prior to regulation, rates had been much higher, and newspapers reported many stories of individuals and families killing themselves and their offspring as a result of their debts. There are quite a few stories in the Taipei Times about this issue:

In fact, an article last year cited over 3,000,000 credit card slaves (about 1 in 8 of the population!), and more than 400,000 Taiwanese have been declared bankrupt because they are unable to clear their credit card debts. (cited: The Asian Pacific Post Newspaper)

Slavery is defined by Wikipedia as: “Slavery is a social-economic system under which certain persons — known as slaves — are deprived of personal freedom and compelled to perform labour or services. “

While the definition is rather narrower than would warrant, it is possible to characterize credit card debt as a form of slavery, simply because the high interest rates deprive customers of their personal freedom as they struggle to pay off their debts.

To some ‘credit card slaves’, it seems they are indentured to the financing companies, and some financing companies don’t hesitate to employ less than orthodox means to ensure repayment. However, to suggest that credit card debt is a form of slavery is to underestimate one important factor: it is the borrower who incurred this debt, in the first place. The compounding factor of course is the high level of interest and penalties that are imposed subsequently on the borrower.

While this may depress many creditors who stare at the pile of mounting debts, this thought should encourage because if it’s something that was done by you, then it can be fixed, too, no matter the scale of the challenge.

Credit Cards, Bank Accounts and Salaries Part 2

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In this series, I’m looking at our changing attitudes to money, and answer the simple question: are we all credit card slaves now? Part 1 was yesterday: entitled Where did our attitudes to money come from?

Credit Cards, Bank Accounts and Salaries

Suddenly from subsisting from week to week on wages became more challenging as we were all forced to wait four calendar weeks plus some for our paychecks. And wow! Didn’t it feel good having that much cash in your bank account? Didn’t it?

“You bet. And so, you’d splurge a little here and a little there. You’d write a few checks (‘cheques’ to all you Brits!) to buy the groceries, and hope the store didn’t cash them too early, or that the overdraft fee wasn’t too much. You’d be all right because payday was just a few days away anyway!”

When credit cards were first invented, they were primarily intended for luxury consumption for business travelers and ‘wealthy’ travelers, too. American Express, MasterCard, Visa, etc, Classic, Gold, Platinum, Clear cards

All were designed to create the impression of wealth. Unfortunately, the banks’ pursuit of profits above customers hastened the degrading of the higher value lines, while forcing banks to create ever new ‘brands’ at the premium or private finance end of the spectrum. Meanwhile, for ordinary consumers the presence of credit cards in your wallet went from a sign of wealth to a sign of status to a mere sign of credit worthiness.

Thereby, the credit card industry created a whole new language of ‘apparent’ wealth, where terms like independent income were replaced by disposable income; net worth became credit worth; rate of return became APR; and business deals became ‘transaction fees’. The whole language of wealth was corrupted in such a way that on graduation, students are now told to build your credit history, to check your credit ratings, and to manage your credit score successfully. What happened to building your wealth, checking your investments returns and managing your portfolio?

Has credit card ‘wealth’ affected your ability to build real wealth? Did you borrow too much or pay too much interest? I would love to hear your comments on this…