How to Blow 10 Million Dollars in 10 Years

by Vered DeLeeuw · 31 comments

If you’re ever lucky enough to get a 10 million dollars windfall and feel like blowing it all in just a decade so that you end up with nothing, here’s what you should do:

1. Watch others, who have much more than you have, and emulate their lifestyles, trying to prove that you’re “just as good as they are.

2. Do not, under any circumstances, invest the money in a conservative mix of stocks, bonds, real estate, commodities and cash. Instead:

3. Go ahead and buy a huge house. Renovate it to the highest standards.

4. Buy a few vacation properties. Renovate them too.

5. Start a collection of expensive cars. Each car should cost at least $300,000.

6. Buy a few horses. Focus on expensive horses that cost around $200,000.

7. Indulge in $10,000 fur coats.

8. Go on frequent vacations. Stay at $1000-a-night hotels.

Fast forward ten years. Mission accomplished!

But I won’t take credit for these tips! I have learned them from this story about a family who had lost 10 million dollars over the course of ten years.

Humor aside, this is a fascinating example of bad money management. It has all the right ingredients – greed, naivete, lack of planning, a strong desire to keep up, and – above all – a profound misunderstanding of what money is worth these days and what is the best way to handle a large lump sum.

A few weeks ago, we asked, “What Would You Do with a Million Dollars?” People tend to imagine the amazing things being a millionaire would enable them to do, but being a millionaire, as in having a few million dollars, does NOT enable you to lead a very lavish lifestyle.

The family in the story got 10 million dollars. It’s a nice amount of money – VERY nice – but their problem was that they had completely changed their lifestyle, and began to live as if they had not 10 million, but 100 million.

Ten million dollars can evaporate pretty quickly. The right way to handle this type of money is to invest it conservatively and enjoy the income it can produce. With this kind of money, the right thing to do is probably to spend a small percentage on yourself, on helping family members and on donating to worthy causes. But the rest should be invested – conservatively and carefully, keeping in mind the importance of diversification – apart from reckless spending, one of the biggest mistakes the Martin family had done was tying their entire fortune in real estate.

Suppose you spend 10 percent and are left with 9 million dollars. Assuming a conservative asset mix and 5% annual yield, this type of money can generate a very nice pre-tax annual income of around half a million dollars! If you’re still fairly young, it does make sense to keep working – find something you love to do, but don’t quit working altogether. If you spend just part of the income your investments generate, your money will have a chance to keep growing and will not erode too much with inflation.

I’m not saying that the couple in the story should not have made any changes to their previous lifestyle. Life is not all about being careful and prudent – it is also about having fun and seizing the moment. But the kind of money they had should enable them to have fun AND keep most of the money. Yes, the Great Recession would have lowered the value of their investments, but with a conservative mix, they would have recovered by now.

The story of the Martin family is a painful one to read because it’s a story of a missed opportunity – and the opportunity here was huge. With ten million dollars, the Martin couple should have been financially secure. They should have been able to lead a comfortable lifestyle, put their kids through college and leave them a nice inheritance. Instead, they are now back to square one – and at age 59, that’s not a good place to be.

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{ 31 comments… read them below or add one }

Anthony February 24, 2011 at 7:14 am

I missed your earlier piece, but this one strikes a personal note for me. In 1986, my mother received a windfall of $2.5M. She stopped working and over the years she moved three times; spent too much on homes, hotels, and cars; was generous to a fault; got bilked by a broker; and fell to drink. Parallel to this her ability to maintain relationships with friends and family frayed. Sixteen years later, she came to me for support, and a couple years later she was gone, at 64.

The Internet has a lot of anecdotal information about lottery winners going broke and becoming miserable, but is light on statistics. The best two posts I found were from Consumerism Commentary and Lance Bledsoe.

From a behavioral perspective, two effects seem to be in play: the house money / found money effect and the general human inability to comprehend large numbers. Given general financial illiteracy, the preceding two items are amplified.

What’s scary to me is that my mother was a mathematician by training and a computer scientist by trade. If she was unable to avoid this trap, maybe Bill Bernstein’s theory in the Investor’s Manifesto that only a few percent of us are cut out to manage our own money is more realism than pessimism.

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vered February 24, 2011 at 10:09 am

Wow. Thank you for sharing your personal story. I do hope the conclusion is not “only a few percent of us are cut out to manage our own money,” because financial planners don’t necessarily help – they often make terrible recommendations in these windfall cases. (But I don’t have statistics of course).

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MoneyNing February 24, 2011 at 11:37 am

Sorry to hear about your story, but thank you for sharing. I think it’s important to know that even though the majority will always say they will cherish a huge windfall, the reality is that too many don’t have the ability to make the sum last a lifetime.

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Anthony February 24, 2011 at 3:48 pm

Thanks for your replies. I think David hit the real lesson on the head, which is that many of us are ill-equipped to deal with a windfall (hopefully we in the personal finance blogosphere are more immune, but I can’t burn this bridge until I cross it). I’m also close to a woman who received a smaller windfall when her father passed away. Fortunately, it wasn’t detrimental to her personal relationships, but the money’s still gone.

Vered also raises an interesting point. Again to quote Bernstein, “Guru is a popular word because charlatan is too hard to spell.” With the number of financial planners either too ignorant or cynical about the virtues of modern portfolio theory, indexing, etc., the question is not just one of finding an advisor, but rather the harder one of whether we’re more equipped to find an honest advisor or to acquire the skills to manage our own portfolios.

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MoneyNing February 25, 2011 at 5:01 pm

I think we are just “more” immune, but no one is ever totally immune. What I mean is that we may splurge less, but I doubt that anyone will be able to totally NOT splurge on ANYTHING if they ever get a $10 million windfall. Of course, splurging a little is perfectly fine, but where to draw the line will be key.

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Michael James February 24, 2011 at 7:33 am

That’s an interesting story. I’d be even a little more conservative than your suggestions. I’d count on about 3% (after tax) or about $25,000 per month. I wouldn’t dig into the principal at all at first. Any helping of family or charitable donations would come out of this $25,000 per month. If I wanted a $100,000 car, I’d have to save up for several months. No payments for me.

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vered February 24, 2011 at 10:10 am

Certainly – the more conservative, the better.

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MoneyNing February 24, 2011 at 10:28 am

That’s an awesome plan for sure, though I must confess that I might not be able to be THAT conservative (and I own a frugal/personal finance blog.)

For example, there are some specific family situations where I know I will help out, given that I now have a 8 figure portfolio. Apart from that though, there really isn’t anything I’d spend money on (I have a car I love, and a house I’m comfortable in), and since I own my own business, it will still be business as usual.

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Michael James February 24, 2011 at 10:33 am

I guess I’ve already helped out family on big things. Helping people with a slice of $25,000 each month can certainly add up over time.

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MoneyNing February 24, 2011 at 11:00 am

For sure. Depending on how much of the $25k per month pie you shell out for this, it could very well end up being much more than a lump sum.

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retirebyforty February 24, 2011 at 11:07 am

I would set aside a portion of the windfall (maybe 5%) for fun money and invest the rest. I wouldn’t be that conservative with the investment, why change your investment policy? Then I’d give myself a monthly allowance and see how it goes from there. ;)

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Diane H. February 25, 2011 at 2:42 am

Great post Vered. I did notice that your example talked about pre-tax income, which I think sometimes can be another problem. We grew up financially poor and as I began to have a bit more money I had a lot of trouble getting into the habit of thinking about “after tax” income. When you don’t make much you don’t pay much tax – even in the US – and as you have more it’s important to get into the habit of not thinking that you actually have it until AFTER the taxes are paid, especially when it’s not automatically taken away by your employer.

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MoneyNing February 25, 2011 at 9:43 am

Very good point Diane. When I was on salary, I often just thought of my income as what I was getting on my paycheck, after all the deductions and retirement contributions.

My thinking was that being more conservative than I need to with savings is better than the other way around.

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vered February 25, 2011 at 1:10 pm

I agree. Great point.

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Andrea February 25, 2011 at 6:21 am

I’ve always said that if I were to receive a windfall the money wouldn’t change me much. I would enjoy the money, travel a little more, buy a more reliable car, help my parents out, and invest the rest. There is no way I could even think about losing all that money. Especially now that I’m more careful about how I spend the little money that I have.

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Brad Jobs February 25, 2011 at 11:10 am

These are the ways on how to fail your life by spending your money to things that won’t make more money. If you want to fail in life, do these things and die poor. lol If you don’t want this scenario to happen, invest your money to things that will produce more money.

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coumarane February 25, 2011 at 1:49 pm

Very sad to read the misadventure of these people.
We must live looking for people under us and not above.
Thanks

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MoneyNing February 25, 2011 at 5:03 pm

I think the reality is that we must live looking for people BOTH under AND above us. In order to be happy, we need be sympathetic of everybody’s situation and learn from both people above and under.

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Michael J Archibeck February 26, 2011 at 6:37 pm

Unfortunately you can not live someone else’s life for someone else ((

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Travis February 28, 2011 at 9:13 am

Traditional education does a terrible job of teaching what passive income is. I read your piece a bit ago about “What would you do with XX millions of dollars” and loved it.

I’m fortunate to have parents that raised us to be financially minded and a big part of that focused on creating passive income. I’ve had a few nights of sleeplessness thinking about what I would do if I hit that $200M jackpot.

One scenario I think of all the things I WANT and how much it all costs and the other scenario I take ALL the money and put it into a variety of investments (stocks, bonds, commodities, real estate, cash, CD’s, etc.) and see how much income I could create a year.

Incredible to see what kind of lifestyle you could live by focusing on using that money to create multiple income streams as opposed to rushing out and buying things.

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den March 3, 2011 at 4:18 pm

Some of these people are total idiots, investing wisely take time. How many cars can you drive at one time? How many houses can you live in at one time? Do you need to stay at a $1000 a night hotel? NO. Why would you buy horses if you no nothing about them? Why do you need a fur coat if you live in Florida? This is totally NUTS. Unfortunately these people do not know the first thing about money management, so the do not deserve it ,that why they end up with nothing.DUMB.

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tom April 1, 2011 at 11:03 am

I found it funny that some posters here do not think of 25k a month as a life style change. apperantely you do not need to win the lottery, you already have won the american lottery of work=reward. In recent years I have made from 25 to 55k a year, not a month. I beleive that a simple 1 million could be turned in to a monthly income of 5 to 7 thousand dollars. which would allow me to stop working and enjoy life a little more. Its enought to mantain my current life and hobbies with out having to work 60 hours a week plus to afford those hobbies. That in its self would be a lifestyle change for me.

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SantaFeJack June 6, 2011 at 8:35 am

I have to agree. If these readers have a lifestyle commensurate with a $300,000./yr. income, more power to them. But they are far from average. And I’m going to assume have more financial smarts than most.

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Generalist April 6, 2011 at 12:08 pm

My wife and I sometimes talk about what we would do if we won one of the big lotteries and didn’t have a lot of time to do detailed financial planning. Our goal would be to live off part of the earnings from the windfall. Anything left over would go into earning more money.

Keeping in mind human nature, it would be a two step process.

Step one would be to allocate a small amount as splurge money. With a base of ten million dollars, a splurge of one hundred thousand, or one percent, would be reasonable. This would more than meet our ‘splurge’ needs since we’re not the type to get too fancy. (For us the equivalent of a 300K car would be getting a 50K car every six years for the next thirty years. I would have to be careful when it comes to cameras and computers though.)

Step two would be to split the remaining 9.9 million into two investment categories: low risk and high risk.

The low risk investments would handle the monthly income and we would do our best to only use part of that income. Anything left over would be redirected to the low risk investments so that the income has a chance of staying ahead of inflation.

The high risk investments would be aimed at increasing the total amount of money available. It would be spread through several sectors and have a medium to long term focus. There might even be a ‘hot investment’ fund. Half of the post tax gains from these investments would go into the low risk investments while the rest goes back into the high risk investments.

I suspect that dividing the 9.9 million into half for each side would work, even with the low interest rates the banks offer. Spending would be kept under tight control until we actually started getting income from the low risk investments. It would be loosened a little after that point, but not much.

At some point we’d get a financial manager or two with the goal of increasing the yield of the low risk investments. Another financial manager or two would handle the high risk investments. They would NOT be part of the same financial organization. We would also watch them carefully, keeping in close touch and making sure we understand why they made the decisions they make.

Even with the extra income, I would likely keep my job because it is pleasant enough and has decent benefits. That would mean that the family would have a bit more ‘splurge’ income and a lot more money going back into the low risk investments.

Admittedly, it is a financially conservative approach. But it works for me.

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Wayne June 23, 2011 at 6:20 pm

I know someone who spent 20M over 20 years…It was hard to watch, they wouldn’t listen, they had “money managers” “friends” and lots of others take advantage of them..they are now 89 and almost broke….a sad, cautionary tail. 20 million doesn’t go far when you are spending 1 or 2 million a year!

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Advice Seeker July 19, 2011 at 8:51 pm

everyone here looks like a prudent, smart finance people and I want to hear from you what u think. I am 36, married with 3 kids. Live in one of the asian cities that have no capital gain taxes and income taxs hover in the 10-20% range. I have been running my own business since graduation and have just sold it off. Right now i have a networth of about 7M USD. Over the next 3 years, will receive another 5M USD as payments. Am expecting another 2.5M next year 1Q.

I find all asset prices very high right now and have basically a 1M speculative portfolio of equities (about 15 stocks, 1 leveraged convertible bond) which is not doing well now with about 15% loss. Since receiving my money, there is nothing much to buy, so I have bought ST corp bonds (maturing 1-3 years) of about 1M USD and another MT/LT (maturing 4-10to perp) bonds of about 3M USD. I have another 1M cash waiting for equity market to correct/tank to build a blue chip portfolio. The last 1.2M in tied up in my home and some misc alternative investments/assets (smaller companies) etc.

Have not bought anything spectacular yet. But may buy a nice car in 2012 for about 250K. My question is that in this high inflation, low interest rate, high asset price environment…. what should i be buying? There seems to be nothing and i feel like it is such a waste…

My current total portfolio for this year will yield only about 0.5% (no thanks to speculative losses). MT/LT Bond portfolio part is about 3.8% yield only due to conversion to local currency. USD /Euro/GBP bonds are high yielding but the currency keeps depreciating against my home currency. ST Bond/cash yields about 1.3%.

I am still working in the company so there is some income to cover all my usual expenses. My goal is to have a portfolio that generates about 5% after tax. Annual expenditure is about 250K USD for everything we spend including mortgage payments.

Any perspectives and advice is appreciated.

ps: I use 2 private banks. My view is that they provide minimal advice. Not even entry points advice let alone strategic portolio planning. I use them mainly for comparing quotes, lifestyle services and perks.

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Patrick Dugan March 30, 2013 at 10:19 am

I’m striving to be on the same path as you and have about 5 years experience managing my own money, trading, using different countries’ currency regimes to leverage my cost base in my start-ups, ect. Maybe I can lend you a few simple pieces of advice.

First is, what’s your mortgage rate? If you amortize debt, you’re “yielding” at least the cost of the debt. It’s negative math but the commutative property is funny like that, carrying debt only makes sense if you need it or if the cost is lower than your typical yield. You have a 100% probability of realizing the negative gain of not paying that interest, it’s a slam dunk.

Second, look abroad. Why invest your money in the same countries/markets that got you the money in the first place? Capitalism rewards diversity and adventure, those who look for the unturned rocks. I could suggest with some bias that you look into South American farmland investment, particularly in Chile or Uruguay. Also by the way, if you can get past the legal hurdles (such as by starting a local company) you can invest your liquid low-risk assets in Chilean deposits yielding between 4.6% on 3o-day liquidity and 7.2% on 2-year CDs.

Third, regarding high risk investments, are you a trader? Do you feel comfortable and enjoy working at market timing and allocation re-balancing? If not, you might consider becoming an angel investor for companies in the same industry you made your money in, or starting a new business – risk and stress are risk and stress, but leveraging your expertise doing what you care about is not fungible.

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Rick Lossner March 13, 2012 at 5:14 am

Get a kick out of most of the responses here :)

Remember the 20/80 Rule.. .. YOU are in the 20% that actually comprehends finances… that’s WHY you are on this blog to begin with :) 80% of the rest of the population is stumbling around clueless to some degree, in the big picture of finances. And, they have the better chance of winning the lottery! Not only are they in a higher percentage group to begin with , but they actually play the lottery to begin with!!!

Obviously, we’d all like to think we have the brain cells to do this right, in a windfall situation. How many of us haven’t sat around , just once , and had the ” if I won the lottery……..” discussion…

However, I spend…. $1 to $2 .. a month.. if any … on lottery tickets or gambling of any sorts. My guess is all of you reading this are in the same boat. So, we can ramble on how we would spend the $$ and be smarter, but unless your Uncle is loaded and on his deathbed, one can only hope you are VERY lucky to beat your increased odds of this never happening? :)

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Madchen June 6, 2012 at 4:07 pm

I’m scared half to death this might happen to me. I have lived on $20,000/yr for about fifteen years and it’s been an extreme struggle (raising a teenager right now.) Turns out, I have quite a few acres sitting on lots of oil through an inheritance and have signed a lease so they can put oil wells in. Luckily I still have some months of poverty ahead before the money starts coming in and I’m CRAMMING because I had no idea what a CD or mutual fund was a month ago. I don’t trust going out to hire an accountant or anyone when the checks start coming because of the horror stories.

I have a fear I will “go crazy” for lack of a better word and blow it all. I live month to month right now and drive a 15 year old car. I struggle to buy groceries.

I would like clothes and trips and nice hotels. I would like a modest house and a newer car (I refuse to buy a new car, that’s one thing I wouldn’t do, cars don’t mean much to me.)

Another thing that worries me is the depletion rate of oil wells. What if I get accustomed to a nice lifestyle and the oil starts drying up? I’m losing sleep over this and I’m finally starting to understand what people mean when they talk about money bringing problems.

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Patrick Dugan March 30, 2013 at 10:23 am

Just set some simple rules for yourself and live by them:

Don’t spend more than $25,000 on a car, make sure it’s one that doesn’t require lots of maintainence and will last you at least 5-10 years.

Don’t spend more than $250,000 on a house, make sure it’s low maintainence and invest in stuff like greywater recycling, solar-water heating, a garden ect.

Try to live on less than $50,000 a year and invest all the extra money in things that have nothing to do with oil.

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Fig March 10, 2013 at 7:09 am

LMAO @ this thread.

“Stupid people are always parted from their money”

The question that needs to be asked and answered is which one are you?

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