An older couple with a little bit of money, not knowing if they should give the money to their children that are financially irresponsible. I was driving in the car some time ago listening to the local financial radio station and a specific conversation of an older man with over 3,000,000 dollars that wanted to give the money to his daughter. The problem he was having was knowing that she was and is very irresponsible with managing money, hence it put him into a position of not knowing what he should do.
We all know, that giving money to people that are not responsible and financially uneducated is generally not a good idea. We also know that it would be a matter of several short years until the money would be gone forever. There are multiple wise options to approach this situation rationally. There may be other advisors with different opinions, however, in our opinion; the best approach should be as follow:
- The first line of order should always be to protect your investment capital. If you put 3,000,000 dollars into a bank you have the following problem:
– only 250,000 is insured by FDIC. The rest is at risk meaning if the bank goes bankrupt you may and probably will lose 2,750,000.
– such an amount will be losing money in the bank today because current inflation is at 1.8% which the banks keep paying a dividend of 1.5%. Which simply means that you will be losing 0.3% on your money. - Second, create a trust account and find good wealth management firm. Do not underestimate the importance of having a trust account and a will in place. It is extremely important to do this immediately.
- Third, spread your investment into several decent conservative investments paying at least 8% return. By doing so you will eliminate the risk. You want to ensure your investments have been spread into different types of investments such as bonds, stock market, real-estate, and many others. For example, it can be spread out into 7 to10 investments; you want to make sure at least 4 to 5 investments are the types of investments that will not be affected by economic cycles.
- Fourth; Find a very good Financial advisor, someone that has a lot of reputation and good results. Always run a background check on a person no matter how good he/she is according to others. Good and qualified financial advisors are not cheap, however, in such a situation it is worth spending money on.
- Fifth and last, “Pull the trigger†plan it well to the last detail and make sure all your questions are answered by your financial advisor. When ready, spread out your savings into multiple investment vehicles that will pay your kids, a steady monthly cash flow that may and most likely will last for a very long time as long as it will be well managed.
3,000,000-dollar investments will earn you about 240,000 annually with 8% yield. In reality, you should be earning way over 8% annually assuming 3 out of 10 investments will be invested into Higher Risk Investments. If you did a good job finding a good financial advisor, you will be earning over 12% on your investment.
Remember not all financial advisors that present themselves well, are necessarily good advisors that work primarily in your best interest. Some of them are great and truly care about their client’s best interest, while others may not recommend what’s necessarily best for you. Knowing their commission structure from each investment they offer, you can also be helpful.
By following these simple steps, you will ensure your money is:
- Secured and protected.
- It will illuminate the risk of your children making bad financial decisions.
- Your kids will not be able to lose your hard-earned money.
- It will put a rest knowing you do not have to worry about it.
- Your investment base generating positive cash flow will continue to grow steadily.
With approximately 260,000 annual payouts, his daughter can continue to live on an additional $60,000 income or more from the pool of your investments.
Lastly, we strongly recommend to re-invest the remaining principal to take advantage of the power of compounded returns.