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If you suddenly had $10,000 fall into your lap, what would you do with it?
What should you do with it?
Do you look at it as “free” money to spend on something extravagant?
Maybe you should use it to pay bills or pay down debt.
Invest it? Start a business? The ideas are endless.
I am going to suggest something that you may not have considered – nothing. Nothing at all. Put it in the bank and let it sit there. Don’t touch it for any reason and just think about it.
Most of us have no problem coming up with 20 ideas about how to spend it. How many have the discipline of just letting it sit there? What is the benefit of letting it sit there? Especially with bank interest rates so low, we don’t see the benefit of it just sitting there. We need to put it “to work”!
The benefit is OPTIONS; money for opportunities. Money in the bank gives you options. Optionality is one of the most under appreciated concepts in finance. It’s time to bring it back in vogue. It is a concept that is well understood by the wealthy. Successful businesses know it too. Both hold more cash than you think.
The financially fragile not only have all their money committed, but they also have a running list of ideas of how to spend money they don’t yet have. This is how most of us start out dealing with our finances. Our brains are actually designed to work this way. Most of human history we have lived in what researchers have called Immediate Return Environments. Meaning, the actions that you take provide immediate benefits.
James Clear provides a more detailed explanation of this concept that I encourage you to read.
Recently, in relative terms, our environment has changed to a Delayed Return Environment. We take actions today that result in some potential benefit in the future. This is a difficult environment to live in because we don’t get the immediate feedback of the long-term impact of our actions. Worse yet, some actions provide immediate rewards that are harmful to you in the long-term. This pretty much summarizes why the majority of Americans struggle to meet unexpected expenses.
We are hardwired for the immediate return. It takes work to overcome this tendency. But long-term financial health in today’s environment depends on developing this skill. Your financial resilience depends on you developing this skill. It is an advanced skill…….a killer skill. Anyone who has amassed any kind of financial wealth has mastered this skill. Without it, you will always be playing catch up; one step behind. Never really being able to take any level of risk because there is no room in your finances for taking a chance or exploring an opportunity.
I struggled for a long time to get out of the immediate return environment. I was a single mom with 2 kids to support – it wasn’t easy. But I wanted to provide security for all of us. Having nothing set aside for the future made me feel weak and vulnerable….I hated that.
So how did I develop this skill? It started with unexpected money. Sure I had a bunch of ideas about how I could spend it. I had developed the habit of saving for big things like retirement. What I didn’t have was just good old “money in the bank”. So that one small bit of extra money was the start. Soon I started to look for ways to add to this amount and it is a habit that I continue today.
So what do you do with this money? I look at it as money to spend on things that have the potential to significantly enhance the quality of my life. I used this fund when I quit my corporate job to travel. I have used it for real estate purchases. But most of all it is my security blanket. Slack in my financial system that reduces stress.
Next time you receive unexpected money, think about creating this for yourself. Maybe it won’t be $10,000. Maybe it is a much smaller amount. But giving yourself options is one of the best gifts you can give yourself. Over time you can build the option to explore and follow your curiosity with an interesting project just for the sake of it. Or pursue something to help other people, even if it won’t create an immediate financial return. Whatever option is meaningful to you. It all starts with options.
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