Saturday, May 29, 2010

Newly Rich or Expect to be? Google Employee #23 on What to do With Your Millions

From Paul Buchheit:
There's another "I just got a bunch of money, what do I do now?" type post on Hacker News today, and much of the advice is from people who clearly don't know, though the current top comment is actually very good. Since this is a relatively common issue (ha ha) in the startup world, I think it's worth sharing a little of what I've learned from observing others who have this "problem" (yeah, cry me a river, right?). This is somewhat dangerous since money is a very delicate topic for many people, so if you have any strong feelings, please skip this post.

Although today's poster only asked, "What do I do with my money?", there's a second, related question that's also very important, "What do I do with my life?" In both cases, I think the right answer is, "start slow, and avoid making any big decisions now", though as always, there are exceptions.

The money question is the easier of the two to answer: First, don't lose the money!

Many people will naively tell you to hire a financial advisor. What those people don't understand is that the only skill a financial advisor needs in order to be successful is the ability to sell you things. Their actual financial skills are almost irrelevant. Unfortunately, this means that you will need to learn something about money management, and that will take time. Fortunately, you have plenty of time. Read what Warren Buffett has to say about financial helpers. Spend a few years getting recommendations and talking to various advisors (intermittently, not full-time, of course). Avoid hiring this guy. Meanwhile, put your money in a very safe fixed-income investment, such as short-term CDs. You can circumvent the FDIC insurance limit by having the money spread accross multiple banks (think of it as "RAID for money") -- see CDARS for more info. Don't rush to invest it in the stock market -- that's risky and you could easily lose half of your money in a matter of months. Avoid long-term or illiquid investments, though it's fine to put a few percent into random things such as startups, but understand that you'll probably lose that money, so consider it an educational expense.

Longer term, you'll probably want to diversify into other types of investments. Unfortunately, there's no simple formula for how to do this, and the right answer will depend on your own financial particulars, emotional composition (how does losing money make you feel?), etc. Again though, the most important thing to understand is that you don't need to decide this now. If anyone pressures you to do anything right now (especially financial advisors), tell them that you are not presently interested in their services, only be less polite about it :)...MORE
HT: PE Hub