During a recent money crunch, I kept pondering how nice it might be to have extra money in my checking account. When I received an actual estate equity distribution of $106,000, I used to be enormously relieved. But then I used to be faced with the somewhat stressful decision of find out how to reinvest the cash.
My private real estate fund invested $47,000 of my capital in a deal seven years ago. It earned an internal rate of return of about 12.2 percent, leading to a capital distribution of $106,000. For seven years, I didn’t take into consideration my $47,000 investment in any respect until the surprise distribution got here. It was nice, and that is one among the essential reasons I like to speculate as much as 20 percent of my capital in private funds.
However, let’s discuss how money could make you poorer when you’re not careful. It’s slightly ironic that there is a lot discuss money being king.
Why you shouldn’t have an excessive amount of money
There are three essential the explanation why money should only make up a tiny fraction of your net price. Let’s discuss each of those reasons intimately.
1) Cash is a loser in the long run
If you leaf through my asset allocation models, I suggest keeping not more than 5% – 10% of your net price in money, depending on the economic cycle and your personal financial situation. The reason for that is that money has historically underperformed most assets. Cash only tends to perform higher after we are in an economic recession.
Fortunately for investors in stocks, real estate and other dangerous assets, they have a tendency to rise. For stocks, the probability is about 70% in any given 12 months. For real estate, the probability is even higher, because it is a more stable asset class.
So when you hold an excessive amount of of your net price in money, over time you are more likely to fall behind others who invest more of their money in dangerous investments.
There could also be times when money market funds, where you’ll be able to safely store your money, offer high rates of interest. However, money market fund rates of interest reflect the rate of interest and inflation environment. When you hold money in a money market fund, it will be significant to calculate the actual rate of interest (nominal rate of interest minus inflation).
2) The temptation is just too great to spend money carelessly on stuff you don’t need
If you suddenly start earning over $100,000, you could be tempted to purchase plenty of things that do not increase your wealth.
You might buy a luxury automobile for $80,000 when you might just as easily get a $25,000 one. You could be tempted to purchase a chrome steel Rolex Daytona for $22,000 when your iPhone would suffice. Or you may violate my vacation spending guide and treat yourself to a two-week family vacation in Hawaii for $40,000 when it is best to have only spent $10,000.
It’s easy to say you are going to avoid wasting or invest your windfall, but putting it into motion is far harder than saying it.
There’s a reason why people recurrently spend their tax refunds on whatever they need – they view the cash as a bonus fairly than their very own!
There’s also a reason why the typical net price of a house owner is far higher than the typical net price of a renter. Forced saving keeps homeowners from bad spending habits.
Buddha said, “Desire is the cause of all suffering.” Once you’ve gotten plenty of money, you’ll be able to fulfill many desires that could make you poorer fairly than richer.
3) It might be extremely difficult to speculate large amounts of cash
Dollar cost averaging is probably the greatest ways to speculate for the long run. Regardless of how the stock market performs, you just proceed to speculate a hard and fast sum of money at regular intervals. Dollar cost averaging takes the guesswork out of when to speculate.
However, if you’ve gotten a big sum of money, chances are you’ll find it much harder to speculate it than your usual monthly money flow. This could also be very true if the brand new infusion of money comes from a long-term investment that has performed well. The very last thing you wish to do is reinvest the proceeds and wipe out all of your gains from the previous investment!
Since I began Financial Samurai in 2009, I even have encountered and advised many individuals who’ve huge money reserves – sometimes 30% to 70% of their net price. When I ask them why they have not invested their money, they sometimes say they do not know what to speculate in. In reality, they’re too afraid of losing their hard-earned money.
I even have typically invested between $5,000 and $20,000 monthly for the past 20 years, so investing the $106,000 windfall from the actual estate distribution is greater than five times my normal amount.
Since the actual estate investment was for seven years, I used to be afraid of quickly losing the gains through a foul investment. Everything from the stock market to real estate had recovered from their lows, so I cautiously invested between $1,000 and $10,000 in each transaction over the following two months.
Some stock purchases with my financial windfall
Here is a spreadsheet I downloaded from Fidelity showing a few of the stock purchases I made using Real Estate Equity Allocation. Essentially, over three months, I purchased the Vanguard Total Stock Market Index Fund ETF and growth stocks like Amazon, Apple, Nvidia, and the Russell 2000 Index. The last two columns show the variety of shares purchased and the share price.
This wasn’t a machine entering my orders based on an algorithm. It was me buying stocks several times every week when I believed the timing was right. It was each fun and exhausting. Managing family funds can sometimes feel like a full-time job.
If I hadn’t been afraid of losing my money, I’d have reinvested the complete $106,000 inside every week. But with investing, you never have complete certainty. Instead, you develop an asset allocation framework and an investment thesis. Then you’ve gotten to have the courage to take motion and invest accordingly.
Thoughts on why I purchased these stocks
VTI is my default stock investment on this taxable portfolio when I can not consider the rest to purchase. I exploit VTI to construct exposure to public stocks.
Apple is a stock I even have held for greater than 12 years and proceed to purchase. I purchased more shares in May before the developer conference because I consider Apple will probably be a giant winner in artificial intelligence. I consider the iPhone 16 upgrade cycle will probably be stronger than expected since the 16 might want to run Apple Intelligence on mobile devices.
I’ve also owned Amazon stock for greater than 12 years and have been accumulating more as the corporate has lagged behind its other big tech competitors this 12 months. Funnily enough, I met their CEO Andy Jassy at a celebration last week and thanked him for his service.
I’ve held Tesla since 2016, but sold lots in 2023 to purchase a house, so I’m just rebuilding the position after the sell-off. Competition for electric cars is hard, but I believe Tesla will release successful recent models and get a re-rating for its other businesses.
Gradually more presence in the sphere of AI
Over the last two years, I’ve also grow to be more involved in publicly traded artificial intelligence firms, which is why I purchased Nvidia. I’m also constructing a major position in private AI firms, as firms stay private longer, thereby generating more profits for the private investor.
The easiest method to construct more direct presence with private AI firms is thru the Fundrise Venture Product. So far I even have invested $143,000 within the product and there may be more to come back.
Without plenty of money, it is advisable to deal with your funds
One of the essential consequences of getting less passive income is that I’m forced to watch our household funds more rigorously. This essentially means monitoring our money flow, reducing expenses, anticipating future capital calls, investing more selectively, and assessing our risk exposure.
Without a considerable amount of money in my checking account or money market fund, I’m also rather more motivated to be energetic and earn extra money through investments. As a result, an absence of money can actually make you richer. Without a big financial buffer, you are missing out.
During my liquidity crisis, I reviewed my Authorize account at the least twice a day, in comparison with once every week up to now. In hindsight, this was an excellent thing, as my asset mix modified significantly after purchasing the home.
As your money holdings increase, the motivation to work hard and invest correctly dwindles. Because why trouble when you haven’t got to, right? If you are a parent, giving your child numerous money can hurt their self-motivation.
Make it harder to spend your money
If you wish to protect yourself from wealth loss and increase your probabilities of wealth growth, keep as little money as possible in your essential account. Keep only as much money as you wish in your regular expenses.
Move as much money as you’ll be able to into your brokerage account and invest it. That way, it’s slightly harder to access for unnecessary expenses. You also can diversify your money into other investments like private real estate and enterprise capital, which makes your money even harder to access.
My private real estate investment from 2017 saved me in 2024. I expect my many other private real estate investments from the past will help me in the long run as well, as I even have consistently invested the vast majority of our free money flow annually.
Having money is good, but when you’ve been earning your living in money for about six months, it is best to seriously consider investing it. Your future self will thanks.
Readers ask
Have you ever spent a big windfall on unnecessary things? If so, what did you find yourself buying? How else can having plenty of money make you poorer? What is your ideal average money balance?
Diversify your investments with to gather donationsmy top pick for personal real estate. Fundrise has over $3.3 billion under management and focuses on the Sunbelt region where valuations are lower and yields are higher. Invest your money when you consider mortgage rates are coming down and there will probably be a long-term shift toward lower-cost areas.
As all the time, past performance isn’t any guarantee of future results. Only invest what you’ll be able to afford to lose and don’t must. Fundrise is a sponsor of Financial Samurai and Financial Samurai is an investor in Fundrise.
