The lotto jingle of ‘Wouldn’t it be nice’ immediately springs to mind at the prospect of a unexpected seven figure windfall. The second thought that comes to my mind is ‘be careful what you wish for’.
Let me share a true story with you about a mate of mine — we’ll call him Jonesy — who did receive a windfall inheritance. Jonesy had absolutely no idea this money would land in his lap. It came to him courteous of the proverbial rich uncle. Apparently his bachelor uncle made a quid or two from buying and selling shares in Mother England. No one in Australia had any inkling about old Uncle Henry’s wealth.
Uncle Henry lived in a modest home in West Dulwich. Was a former civil servant. Drove a run-of-the-mill Ford. Enjoyed the odd pint at the local. But apparently he had an aptitude for figures and had quite successfully dabbled away at the markets for decades. Jonesy found out this last piece of information from the executor of Uncle Henry’s Will.
When everything was settled — the sale of the West Dulwich house, sorting out the bank accounts and selling off the extensive share portfolio — Jonesy’s share was a tad over $1.5 million. That was a lot of money a decade ago (and still is today).
Jonesy shared many similarities with his uncle — he too was a public servant, he lived in a modest home and enjoyed the odd ale on a hot or cold day — but that’s where it ends. Jonesy had no real aptitude for figures and the only market he dabbled in was the TAB.
Jonesy’s married with two sons. The modest home had a $220,000 mortgage. Jonesy’s wife worked as a receptionist in a local professional firm. Unlike his uncle, discretion was not Jonesy’s strongest quality. He wanted to share the news of his good fortune with his relatives, his mates, his work colleagues, the boys down at the TAB, etc.
When you broadcast this sort of news far and wide you are bound to evoke mixed reactions — some (very few) people are genuinely happy for your windfall; more than will admit to it, have varying degrees of envy; some consciously or sub-consciously wonder how they can use your windfall to enhance their lives (these are the ones who suddenly become a whole lot friendlier) and others actually stop talking to you, believing the money has changed you.
Jonesy and his wife were ill-prepared for the change in the dynamics of their relationships with their family, friends, wider social circle and work mates.
Putting the emotional challenges to one side, let’s see how Jonesy handled the challenge of managing this life-changing amount of money.
At the time Jonesy asked me for my advice. It was a simple strategy — pay off the home loan and put the remaining $1.3 million in the bank for 12 months.
I remember saying to Jonesy, ‘this way you’re debt free and it gives you time to consider your options.’ Hasten slowly. Jonesy and his wife appeared to agree with the logic in this approach.
Or at least I thought they had agreed. Here is how Jonesy managed his windfall up to 2008:
- They bought a BMW X5 for $120,000.
- They did pay off their home loan.
- Mrs. Jonesy quit her receptionist position.
- They ‘invested’ $150,000 into a ‘friend’s’ glass and mirror business.
- The family went on a six-week business class trip around the world.
- Jonesy invested $750,000 plus an equivalent margin loan into Aussie equities.
- Due to the ‘success’ of the margin loan strategy during the 2003 to 2007 market boom, Jonesy quit his government job after nearly 30 years of service. He figured he could ‘afford’ to live off his market earnings.
- In leaving the public sector Jonesy relinquished his defined benefit superannuation fund. Jonesy established his own self managed fund. Emboldened with his market ‘success’ and in the belief he had been blessed with Uncle Henry’s stock picking genes, he spent his days share trading.
- Jonesy became convinced the equity in their home was idle money and should be put to work in the share market. They established a home equity loan for $400,000 and invested the entire amount into the market. Jonesy’s other rationale for this ‘investment’ was the loan would be a tax deduction. Brilliant.
- The two sons didn’t distinguish themselves academically (perhaps they thought Dad had money so why bother, or possibly school was just not their thing — we’ll never know). After leaving school they had patchy employment histories. Jonesy bought them a mowing franchise, plus car and equipment.
- The two sons wanted their own space. Rather than pay ‘dead rent’ Jonesy bought them a house. The house purchase was largely financed by debt — on the surface it was another tax saving (negative gearing) strategy but in reality, Jonesy didn’t have a lot of cash funds available at the time — they were enjoying a lifestyle that exceeded their income.
Here’s how it worked out for Jonesy after 2008:
- The X5 became too costly to maintain. Sold it for $20,000 and they now drive a second-hand Holden.
- The ‘friend’s’ business went into receivership with the GFC downturn in the building industry. The $150,000 plus additional capital injections have been given the last burial rites by the receivers.
- Jonesy received a margin call in late 2008 and could not access sufficient capital to meet the call. The margin lender sold the portfolio. After settling the margin loan, Jonesy was left with around $60,000. This ended up in living expenses and settling credit card debts.
- His Self Managed Super Fund took a bath in 2008, losing nearly 80% in value. Jonesy fell victim to the ‘stock picker’s’ curse of following the ‘hot stocks’ — Babcock & Brown, Allco etc.
- The two sons had a falling out over each other’s work ethic and share of the (diminishing) spoils. The franchise business sold for a fraction of its original cost.
- The sons’ rental property was sold — at a loss.
- Jonesy liquidated the share portfolio he purchased with the home equity loan. Total proceeds were around $180,000. He used part of the proceeds to repay the shortfall in the loan used to buy his sons’ home, and the balance was put towards the home equity loan.
- The home equity loan is around $250,000.
- Mrs. Jonesy is working as a night-filler at the local Coles.
- Jonesy is a console attendant for a 24-hour service station.
- One son works on a trawler and the other is in and out of labouring work.
- Jonesy still enjoys an ale.
Jonesy’s NET financial position these days (after taking away the SMSF funds from the home equity loan) is that they still owe around $100,000 on their home. There is nothing worth mentioning in the bank.
This is a sad but true tale of how a windfall was indeed ‘life altering’, but not in the way many think of.
It’s been one hell of a journey for Jonesy. These days he is far more circumspect — a lesson learned the hard way, and far too late.
He has paid a very high price to learn the true value of money and relationships.
In hindsight Uncle Henry should have donated his estate to a UK charity. Jonesy would have been peeved at the time, but he would’ve gotten over it and life would have continued.
Uncle Henry’s Australian heir was not equipped emotionally and not financially savvy enough to be burdened with this inheritance.
Jonesy at least can see one tiny positive from all this. He tells me he has learnt German — well one word of German. Schadenfreude.
Translated this means — pleasure derived from another’s misfortune. Jonesy reckons there are a lot of people secretly happy he is on the bones of this backside. Personally, I am not one of them.
What I see is an opportunity — on so many levels — squandered.
With proper guidance, education and even a modest amount of common sense, this story could have had a vastly different outcome. A real Sliding Doors scenario.
Gowdie Family Wealth is my contribution to making sure my family and yours are psychologically and financially equipped to handle money — irrespective of whether the amount is large or small. Getting the basics right is fundamental to successful lifelong wealth management — there are no shortcuts.
Uncle Henry knew this, but his mistake was his wisdom went to the grave with him.
Upon reflection, Jonesy admits it would have been cheaper to fly to the UK every year or so to pick his late uncle’s brain, rather than the $1.5 million price tag he paid for his ‘school fees’.
As a footnote, the budget news last night just made life a little harder for Jonesy. He won’t be eligible for the age pension until he is 68.
Oh how different it could have been.
for The Markets and Money Australia