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Today, I will go through a simple thought experiment: What would I do if I were given one million dollars. I am thinking of several things I could with one million dollars. I am currently at the beginning of my journey towards Financial Independence. One million is more than eight times my current net worth. So this could mean a lot of different things for me!
Now, I did not invent this thought experiment at all. It was introduced by the Saving Ninja. Actually, I did not discover it on the Saving Ninja blog. I discovered it by reading about this experiment on Retire In Progress blog.
You can find many answers from other bloggers in the original post. I thought it was interesting. So I decided to try it and report my thoughts on the blog.
The original thought experiment, proposed by The Saving Ninja, was in British Sterling Pounds. And Mr. RIP did it in Euros. In this article, I will talk about a million Swiss Francs (CHF). But, this is currently the same as a million U.S. Dollars. So, it is the same thought experiment as getting one million USD.
What does one million means to us?
First of all, it is necessary to realize that 1 million is really a lot of money for us. Our net worth is currently around 125’000. So we would multiply our net worth by nine if we got given one million dollars. Moreover, half our net worth is currently locked in different retirement accounts. So that means our available net worth would be multiplied by 18 if we were to receive that one million dollars. These are really big changes!
My current estimate is that I would need about 1.8 million CHF to retire in Switzerland. It is a slightly pessimistic point of view. But for now, it is our target. After having received the money, we would be at 62.5% of our target! That is much closer than the current 7% of our target that we are at!
After receiving the money
At the moment I receive the money, I would definitely check it out several times. I would probably call my bank to make sure that the money is really mine to spend. It is always a bad idea to spend money that is not truly yours!
Once I know that the money is really there, I would go out to celebrate with Mrs. The Poor Swiss. We would go to a great Chinese restaurant probably. And we would probably order Champagne or cocktails to celebrate. I do not even think we would spend a lot like this, maybe 400 CHF. I am not one to splurge on food and drinks.
After this, we would have to consider what we would do with the money. Here is what our Investor Policy Statement says about such large unexpected windfall:
- No hasty decisions
- Be aware of taxes (only consider the after-tax number)
- Only use up to 10%, guilt-free
- Invest what remains, towards the goal
- Do not increase lifestyle!
So the first thing we would have to do is check whether we need to pay taxes on that amount. For the purpose of this experiment, let’s say this the after-tax amount already.
I am sure I would not use 100K out of the million. There are a few things I would maybe buy for my house. But that is maybe 5K top! In that particular case, we would maybe end up spending 1% of the total amount.
I still see several different routes we could take with this money.
The house route
Buying a house is something I am not yet set on. On the one hand, I would really like to have my own place. And on the other hand, I believe this would slow down my quest for Financial Independence. Currently, I believe that buying a house is not the best way towards FI.
Nevertheless, if I got one million dollars, this is something I would consider for sure. As I said, I would really like to have my own house.
Now there remains the way I would buy the house. There are three main options for buying a house if you have a lot of money in Switzerland:
- You buy the home without debt, in cash.
- You pay 35% of the home with cash and keep 65% of the home value in debt for the rest of your life.
- Or, you pay the minimum, 20%, of the home with cash and pay off the next 15% in a few years. Then you keep 65% as debt, forever.
Personally, I do not believe it makes sense to do 1. Indeed, the current interest rates are extremely low. So it is not bad to have some debt. And if you own your house entirely, you will pay more in taxes. And by investing the remaining money, you can get more money than the interests. If I had the money, I would probably go directly with option 2. In that case, there is only a long-term mortgage and no need to amortize.
By going with option 2, I believe that our rent will be lower in the future. We would only have to pay the interests on the long-term mortgage. Of course, there are other fees. An advantage of buying is also that you are sure you can keep the house. You are not dependent on the owner. And you generally have a better choice of houses if you buy.
Of course, we would invest the remaining money according to our investing plan. Unless we go option 1, we would still have a large amount of money to invest. This would still help us reach Financial Independence much faster than in our current route.
As a side note, it would probably take Mrs. The Poor Swiss and me a few years to find a house that would suit us both. I want something old, she wants something really modern. Moreover, I want an isolated house and she wants something in the middle of the city. And, I want wood, she wants concrete. You can see the difficulties in finding common ground for us!
The full investing route
Another route for using our new one million dollars is to invest it directly. This would be the fastest route to reach Financial Independence.
If I were to invest one million dollars, I would not invest it directly I think. It is generally smarter to invest as a lump sum. However, I would not feel confident about investing one million dollars. Especially when we consider the current market valuations. Also, I would probably have to reconsider my portfolio allocation.
I would probably invest around 100’000 dollars at once in the market. But I would probably invest the rest in at least one year, probably two years. To be honest, I do not really know.
I would also consider new investing choices. I would consider buying a rental property for instance. Since I would get closer to my retirement, I would probably invest in bonds at this point. Indeed, I currently have a lot of bonds. But once I had one million to my net worth, my percentage of bonds will be very low. I will have to decide if I am comfortable with that.
Another thing I would definitely do with that amount of money is open a second broker account. I am currently at DEGIRO, but I would directly open an account at Interactive Brokers. IB is actually cheaper than DEGIRO when you have a large amount of money.
The final choice
I would like to think that I would think about the future for at least a few weeks before I would do anything with the money. Maybe I would even consider other routes. For instance, with one million dollars we could retire in another country such as China where Mrs. The Poor Swiss comes from. I do not really like that idea now. But who knows what will happen when my net worth gets multiplied by 9 in a single day.
Things we would not do
There are things we would definitely do when given such an amount of money.
The first thing to not do would be to announce it to everybody. This can only lead to trouble. Of course, we would change a bit our lifestyle. But we would not tell everybody about this new money. Since I am anonymous on this blog, I may announce it here. But there are a few people who know who I am. I would have to decide that as well.
I do not think we would go on a crazy splurging spree. We have a plan and I believe we are capable of sticking to it. As I said before, we would allow ourselves to spend a bit of the money, according to our Investor Policy Statement. But I do not think we would use more than 1% of the sum.
Another thing we would not do with the money is giving it away. First, nobody in my family or friends really need money. And since we do not plan to announce it to them, there will not be any asking. As for charity, I have to admit that I am not very charitable by nature. Moreover, I do not really trust charities to use the money I would give correctly. There were simply too many scandals where the money ended up in pockets of people who really did not need it!
So, to sum up, if I got given one million dollars, I would either buy a house and continue my path to Financial Independence or fully invest it and continue my path to Financial Independence. In any case, this would bring me much closer to early retirement than I am now. For now, one million would not be enough to directly let us retire. If it was two million dollars, it would be quite different since I would instantly become financially independent.
As you can see in my post, there are still some things that are not clear. For instance, I am not yet sure I will buy a house in the future. And I am not yet sure how to allocate one million dollars to my portfolio. This is fine now since I am far from financial independence. This is something I will have to figure out in the coming years.
Now we have to remember that this is only a thought experiment. Indeed, there is no chance that I will be given one million dollars! And nobody knows exactly how he will react under that kind of event. I hope that I will react correctly to it. But this is something you can only find out the day it happens.
If you like thought experiments, you can read what I would do if I was retired.
What would you do if you got given one million dollars?