WHETHER IT COMES FROM
long-lost Aunt Gertrude, a well-timed real estate sale or a lottery number ripped from a fortune cookie, a six-figure windfall is something we all fantasize about. Not job-quitting, megayacht money: just enough to fund a few of the dream projects that always get pushed to the back burner in favor of paying the bills and like we'd let you forget saving for retirement.
But what happens when the fantasy comes true? Is "found money" easy to spend well or wisely? How difficult is it to manage a windfall?
It may be hard to remember in a time of shaky stock markets and subprime jitters, but it's still the age of affluence in America which means more of us than ever will soon face these sorts of questions. Almost one in 12 American families, or more than nine million households, reported having collected an inheritance of $100,000 or more in recent years, according to the Federal Reserve's Survey of Consumer Finances. That trend should accelerate soon, as baby boomers find themselves on the receiving end of an unprecedented transfer of wealth. And inheritance is just the beginning. Despite the impact of the credit crisis, for example, the average year-end bonus on Wall Street in 2007 was just north of two hundred grand, while law firms dropped similar-size bonus checks on their overworked associates. And never mind those grim housing numbers; nationwide almost six million people sold their homes last year, often netting sizable profits.
Timing is everything, of course, and the arrival of a windfall isn't always a signal to treat yourself to something nice. To begin with not everyone is in a spending mood. The cloudy economic climate drove consumer confidence to a two-year low in November, with many consumers inclined to sit on their money and wait for more-stable times. In addition not everyone should treat a bodacious bequest strictly as fun money. Anyone with significant consumer debt or a barren retirement account common problems in good times or bad should address those first.
But even for people whose financial houses are already in order, there's little that's easy about easy money. According to the Holmes-Rahe scale, used by psychologists to measure stress, a sudden change in net worth is more stressful than changing jobs or getting married. "It creates a cascade of decisions that need to be made," explains Eileen Gallo, a psychotherapist who specializes in financial issues. "You don't want to look back in five years and say, 'Well, I blew that.'"
That's where we come in. We want to help you make the right choices, whether you're investing or splurging. Because windfalls are getting larger all the time, we settled on $100,000 as a convenient round number. Then we consulted experts in fields ranging from fine arts to farmland to philanthropy, looking for ways to get the maximum return. Our insights balance financial benefits with emotional ones. Your inner child, for example, can rejoice in the fact that comic art is sizzling, with sought-after pieces tripling in value within two years. Your inner accountant, on the other hand, will be glad to hear that a hundred large can bring you lower investing fees, higher returns on your stock portfolio, and greater access than ever to Warren Buffett. All the ideas gathered below share a common goal: leveraging a windfall to reap long-term gains and a little fun along the way.
Sportswriter Norman Clarke had never played the lottery before the night a few years back when he stopped to shop in a Denver 7-Eleven. He tossed out a $20 bill for a brownie and a sheaf of scratch-off tickets. You know what they say about beginner's luck. When he got home and checked the tickets, Clarke was $50,000 richer. With his lucky bounty he took advantage of one of real estate's primary virtues as an investment: leverage. He first put a down payment on two rental properties in Las Vegas, then sold those to purchase a condo near the Colorado Rockies baseball stadium. When he moved to Vegas a few years later to become the local paper's gossip columnist, the proceeds from the Denver condo got him into an exclusive tower with celebrity neighbors like George Carlin and Debbie Reynolds; the apartment is currently appraised at $600,000. Those real estate investments "certainly put me on the best financial footing of my life," Clarke says.
Clarke's coup shows just how fruitful it can be to put money into real estate yes, even now. With all the Sturm und Drang over the housing market, it's easy to forget that real estate still presents the opportunity to purchase a valuable asset for what amounts to pennies on the dollar, greatly magnifying the return on investment. Say you put $100,000 down on a $1 million home. If the home increases just 10% in value in two years, to $1.1 million, the return on your down payment is a sweet 100%, minus financing costs. Real estate is historically a stable investment averaging 7.25% annually since 1978, according to a recent study by economists Jack Clark Francis and Roger Ibbotson and it will be again, once the subprime mess is sorted out.
Even after a windfall you'll probably still need to borrow, but that's where an extra $100,000 comes in handy: Ample cash reserves make you more attractive to lenders. The tightening in the credit markets means lenders these days expect at least 10% down. Go beyond that threshold to, say, 25% and a lender may discount the interest rate by an eighth of a point, says Keith Gumbinger, vice president with HSH Associates, a mortgage research firm.
Paying more than 20% also lets you avoid private mortgage insurance, currently about $250 per month for a $400,000 loan. Potentially best of all, a larger down payment could help you avoid a jumbo mortgage one of those loans above $417,000 that Freddie Mac and Fannie Mae won't buy. The spread between conforming and jumbo loans has grown during the subprime crisis and stood at almost three-quarters of a point at the end of 2007, a difference that results in additional expenses of nearly $100,000 on a 30-year $450,000 mortgage.
There's another way to sidestep the volatility of the housing market: Forget about a house, and buy land. As the old saying goes, they aren't making any more of it. Land on average accounted for only 10% of a home's value in 1950. Today it's more than 40%. "The house is like a Honda Accord it deteriorates over time. It's the land that appreciates," says Morris Davis, a real estate professor at the University of Wisconsin who has studied land values. During the boom home builders and speculators spent lavishly to accumulate land. When the party stopped, they abandoned those positions, which contributed to plummeting prices. The cost of suburban land is more than 6% below its 2006 high, according to research firm Real Capital Analytics. In Denver, where builders gobbled up every available parcel, some lots are being unloaded for 50 cents on the dollar. "When your biggest buyer isn't buying, prices are going to go down," says Mike Kboudi, a land broker in the area.
Davis is among those who believe the slide presents an opportunity for savvy buyers. Of course, land can come with its own set of headaches think planning boards and neighbors wanting to restrict development. A less hands-on way to speculate on land is to invest in a company that owns it. Many investing pros are bullish these days on Plum Creek Timber. This real estate investment trust (REIT) owns forest land in more than a dozen states, which has helped it buck the housing slump. The stock rose 16% last year, while the U.S. REIT index fell 22%. The reason: As land values fell, the trust's trees were able to literally grow more valuable.
Aristotle, who was no dummy, once complained that it was a real pain to give money away effectively. Jane Miller will testify that times haven't changed much in that regard. Miller, a stay-at-home mom, and her husband, Charles, a professor, inherited an amount in the low six figures last year. The couple, who live outside of Lincoln, Neb., immediately set aside $35,000 for philanthropy, but they were stumped about what to do with it. Their solution: a donor-advised fund. It allowed the Millers to take a tax deduction, invest the money so it continues to grow and make grants whenever they are ready. "I just love everything about it," Jane says.
Donor-advised funds now hold assets of more than $22 billion, up more than 30% since 2005. Offered primarily through community foundations and charities set up by financial firms, they're all the rage with folks who don't have millions to justify a private foundation; the minimum to open a fund is typically only $5,000 to $25,000. And donations don't have to be in cash: Donors can contribute long-term appreciated securities or even real estate, thus saving on capital gains taxes. A beneficiary who gets a gift of stock or property can even dodge taxes entirely by putting the gift directly in one of these funds.
The Millers went with the Vanguard Charitable Endowment Program, in part because its total fees average less than 1% a year. Fees in the industry are typically slightly higher; steer clear if they exceed 2%. Unlike private foundations, which are required by law to give away at least 5% of their assets each year, donor-advised funds are not legally bound to a minimum grant, although many funds require at least one gift every seven years. In November the Millers made their first grant, anonymously, to the family of a man dying from Lou Gehrig's disease.
These funds are part of a larger shift in philanthropy in which donors strive to stay involved and get maximum bang for their buck, says Gene Tempel, executive director of Indiana University's Center on Philanthropy. Challenge grants, in which a donor agrees to make a contribution if the charity can raise an equal amount from other sources, are another popular tactic. Jack Richmond, owner of all 31 Pizza Hut franchises in San Antonio, makes a $100,000 challenge grant each year to a different local charity. In 10 years, only once has the charity come up short usually, the organization raises $150,000 or more. "It energizes the group and all its volunteers," Richmond says.
Due diligence is a key component of the giving process. Charitable-giving consultant Gail Shapiro recommends meeting with the organization's executives and saying, "Exactly how would you use this money?" The web site givewell.net features in-depth investigations of the effectiveness of certain charities; you can find related data at guidestar.org and charitynavigator.org. One downside to donors' directing their giving to pet projects: It has left many charities unable to keep the lights on and pay the staff. To do the most good with your gift, consider a supplemental donation toward operating expenses. "You would be hailed as a hero if you came in with a gift like that," says Tempel.
As an intellectual property lawyer in New York City representing the likes of Bob Dylan, Deborah McNamara routinely logged 100-hour workweeks. The grind offered few opportunities to indulge her creative impulses, she says: "I felt I was only using one side of my brain." Her escape hatch was almost $60,000 in bonuses that she called her "for-me fund."
In 2005 McNamara, then 31, got her bosses to let her take night classes in fashion design. That led her to a decision to pursue a degree at the Parsons School of Design, where tuition ran about $25,000 a year. She now lives in London, designing custom dresses and planning her first major collection. That bonus money was well spent. "I've gained a million other opportunities," she says. "I guess I could have bought a Porsche, but I'd rather have a really interesting education than a cool car."
A surprising number of professionals feel the same way. Forty-four percent of Americans report pursuing some sort of adult education often with an eye toward changing careers and more than a third of those earn above $75,000 per year, according to the Department of Education. That kind of cash comes in handy, because extra smarts ain't cheap: Average annual costs at a private college now top $30,000, while in-state residents pay more than $10,000 at public universities. Even a certificate degree from a continuing-education program can run into the thousands of dollars. Still, the investment comes with outstanding returns, since workers with advanced degrees earn 45% more than those who have only undergraduate degrees.
Not all life-changing education takes place in the classroom. Three years ago Bill Sweat and Donna Morris left their executive positions at Fidelity Investments in Boston to pursue their shared dream of starting a winery. Rather than jumping right into an academic viticulture program, the couple signed up with Vocation Vacation, a Portland, Ore., company that helps clients test-drive a new career. Sweat and Morris spent three days at a commercial winery performing cellar work, moving barrels and bottling the finished product. Just as important, they spent hours talking with the owner about financial models and other technical aspects of the profession. They left convinced that making wine was something they could do and ready to step up their investment. In 2006 they moved to Dundee, Ore., acquired an existing vineyard and started Winderlea Wine Company. Sweat is auditing wine-making classes at the local community college, while Morris is getting certified through the International Sommelier Guild. In all, they estimate they spent about $45,000 on research and education before they sunk a dollar into the actual winery. "We were leaping into a whole new business and a total change in lifestyle," Morris says. They must have learned something: They bottled their first vintage, of pinot noir, in December.
Collectors have an edge over mere number crunchers. Whether the target is a rare bottle of Screaming Eagle cabernet sauvignon or a Willie Mays rookie card, they put some passion in their portfolio and can generate big returns to boot. But any newbie venturing into the most time-tested form of collecting fine art will stumble into a debate that's generating its own passion: Should a collector buy the best painting he can afford or diversify with a handful of lesser-priced works? "Buy the best" is the traditional argument. Its champions assert that an artist's major works appreciate faster and with less volatility than smaller, cheaper ones and give more emotional satisfaction as well. "The best will always keep its value," says Alasdair Nichol, senior vice president with Freeman's auction house in Philadelphia. New York University economics professor Mike Moses, who developed an index of art prices, begs to differ. He says his research shows that lesser-priced pieces actually gain value more quickly than their big-ticket brethren.
We won't take sides here, but we do have ideas about how to take either approach. Of course, $100,000 won't purchase the top work of the most famous artists. So those looking to buy the best should search for overlooked artists in genres that have held up well through the ebb and flow of artistic fashion. One example: regional American Impressionism. French Impressionist masters like Degas and Monet are known to even cursory museumgoers, but few are aware that Impressionist schools in California, Pennsylvania and Utah produced acclaimed artists as well painters whose work can be had for under $100,000. Collectors began rediscovering the genre in the late 1990s, and the upside can be enormous. Paintings by Fern Isabel Coppedge, of the Pennsylvania school, that sold for less than $10,000 a decade ago now routinely fetch more than $50,000 and sometimes into six figures.
Want to roll the dice on lower-priced work? The best value lies in emerging genres and few of those are hotter than comic art. Comic art refers to the original hand-drawn pages that eventually get compiled into comic books. The pieces are one of a kind and easier to display than the books themselves. The most valuable pages are those where a character makes a first appearance. New York cardiologist Srihari Naidu, 36, began investing seriously in comic art about 10 years ago. In 2004 he paid $3,000 for a page from a miniseries featuring X-Men superhero Wolverine; last year he sold it for $17,000. "There is money to be made if you don't have an emotional attachment to it," he says. It's also possible to make, or drop, a bundle: In 2005 the cover for Batman #11, where the Joker makes his debut, sold for $195,500.
The comic-art market clearly requires a more discerning eye than it did 10 years ago, when it was virtually impossible to make a poor investment, says Stephen Fishler, who runs Metropolis Comics in New York and boasts possibly the largest comic-art collection in the world. Be wary of relying on a single dealer, who has a vested interest in getting high prices. To do your homework join comicartfans.com, where a $75 annual subscription provides access to a community of collectors, as well as data on recent sale prices. Fishler notes that an eventual profit is not the only motivation for collecting: "Sometimes you buy it because you love it."
Most home-related headlines are dour these days, but there's a silver lining: For anyone looking to renovate, prices are finally slipping. The cost of materials is falling, with some key construction components now as much as 40% cheaper than two years ago. And contractors are looking for work instead of turning it down, giving homeowners leverage in negotiating prices and deadlines. With these trends working in the homeowner's favor, a six-figure chunk of cash can create an opportunity to do something bigger, for your wallet and for the planet by thinking green.
In many ways a windfall and an eco-friendly home makeover are made for each other. The front-end costs of renovation scare many homeowners away from going energy-efficient even though those renovations pay for themselves long-term in the form of lower utility bills, higher resale value and even better health. Also, it's more cost-effective to do a single big remodeling push than to take on these projects one at a time. Doing a green renovation piecemeal is "like putting lipstick on a pig," says Carl Seville, a green-building consultant in Decatur, Ga. just plain wasted effort. It can add thousands to the contractor's bill, and the environmental gains of smaller projects are often canceled out by inefficiencies elsewhere in the home.
The first step: Tighten the envelope around the home. Update your insulation, reseal and, if necessary, replace doors and windows 80% of heat gain and loss is through doors, windows and the roof, says Gregory Miedema of Dakota Builders in Tucson, Ariz. Throw in a heating and air-conditioning unit with a seasonal energy-efficiency ratio (SEER) of 15 or higher and you'll cut waste to a minimum. For most homes this can all be done for less than $50,000. Next you can focus on decor improvements that also happen to be good for the planet. Rip out the wall-to-wall carpet a repository for formaldehyde, dust and other toxins and replace it with a hard surface, like sustainable-growth bamboo, which runs about $15 per square foot. In the kitchen and bath, go with solid-surface countertops using recycled glass (same price as granite, about $100 per square foot).
Atlanta dentist Celia Dyer and her husband opted to update a 19th-century farmhouse with high-efficiency insulation and heating systems and dimmers on every light fixture. The couple is already saving more than $150 per month in utility costs, and that's not all. "You even feel better," Dyer says.
Follow Your Bliss
A sun-drenched Saturday immersed in a favorite hobby is among life's great pleasures and a windfall can make life's more expensive hobbies more accessible. That's what happened for Chris Dancy, whose grandmother passed away in 1998 and left him $9,000. Only weeks before, his wife had given him flying lessons as a 40th birthday present: Grandma's bequest was enough to pay for the 40 hours of flight time required by the Federal Aviation Administration to earn his license. He also found a new career, leaving his job as a broadcast journalist to work for the Aircraft Owners and Pilots Association.
Getting started, of course, is only a fraction of the cost for most hobbyists. An addicted aviator who wants his own plane and they all do can easily spend $50,000 on a 25-year-old propeller airplane, with annual maintenance and insurance costs topping $6,000. Intense passion can make it easy for hobbyists to blow through $100,000, whether it's spent on a Winnebago to follow the Nascar circuit or on a collection of high-performance Leica camera lenses and laser printers for a digital-photography studio.
Perhaps no pursuit inspires more obsession than golf, whose devotees gladly fly around the world for the privilege of three-putting an unfamiliar green. Not surprisingly, a six-figure windfall can open the floodgates to a plethora of good walks spoiled. It could fund a decade's worth of vacations to play the royal and ancient game in Scotland, or 200 rounds at Pebble Beach. Golfers seeking more variety can check out The Markers, a destination club with homes in 11 prized golf getaways, including Mexico's Cabo San Lucas; Scottsdale, Ariz.; and South Carolina's Kiawah Island. While full memberships run $300,000, a "Links" membership can be had for $150,000, plus annual dues of $9,500. That gets golfers 28 days per year of access, including greens fees and a concierge to schedule tee times and stock the fridge with their favorite 19th-hole beverage. Members have no equity in the club's properties, but the membership is 85% refundable.
Some golfers simply invest in themselves. Exasperated duffer Steven Littlefield was willing to pay any price to shave strokes off a resilient 25 handicap. Two summers ago the San Diego mortgage consultant abandoned the tweaks and opted for a full remodeling job at The Kingdom, a training facility run by golf equipment company TaylorMade. For $1,000 an hour, Littlefield got a private lesson from Jim Flick Jack Nicklaus's former coach and a set of clubs custom-fitted to his body and swing. Today "the ball actually goes where I aim, and that is a real adrenaline rush for a golfer," he says. The improvement did come with an additional cost, though: His playing partners will no longer bet with him.