Father Sez

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Can a windfall really change people’s lives?

Monday February 18th, 2008 by fathersez

I remember reading in Readers Digest quite some time ago, that should all the money in the world be equally divided amongst everyone, in less than 3 years, the wealth would go back to the earlier distribution.

RacerX wrote about the “buy out packages” being offered by Chrysler to some of its employees. By taking a sum of money, maybe equivalent to about 2 - 3 years of salaries, the workers were expected to walk away and begin life anew. Without the safety net of the Chrysler salaries.

I am not sure if this offer has been completed or how many workers accepted the offer.

I believe most people used to receiving a monthly salary and spending it, attain a certain mind set. A mindset of spending what they have. To be sure, some of the money will go towards savings / investments. However, I dare say that a large amount will go off towards some sort of consumption or another.

And sooner rather than later, they will be left with no job, and no money.

The same has been demonstrated in Malaysia.

a) We have a Government regulated compulsory savings scheme. The employer pays 12% and the employee pays 11% into the Employee Provident Fund (EPF) which manages the funds and pays dividends yearly. The contributions are tax deductible.

EPF officials have been quoted saying that their studies indicate that the people who withdraw their savings in a lump sum upon reaching the age of 55, tend to spend their savings off in 3 years!

b) We also have a Federal Land Development Authority(FELDA). Set up in 1956, it was part of an ambitious plan by our country’s then leaders to create income opportunities for a vast number of underprivileged people. The Government parcelled off huge chunks of land in 5 acre parcels to families who wanted to grow cash crops, mainly rubber and palm oil.

See Wikipedia’s write up on FELDA.

The Government also made large investments in palm oil mills which provided a ready market to the farmers producing the palm oil fruits.

Over the years, some of these land parcels were seen by property companies as having development potential and enticing offers were made to the FELDA settlers. Not surprisingly, a number of the settlers took up the offers and became instant millionaires.

Our tabloids were full of stories of a number of these instant millionaires buying cars, building mansions, swimming pools, taking on second wives and the like. Basically squandering away the funds.

Those of us who are used to receiving regular payments as salaries and use that to manage our financial lives have to be very very careful, when we receive lump sums or windfalls. No matter how we may have planned the utilisation, a little by little the amounts may be frittered away

It would be good and very useful to revisit Mighty Bargain Hunter’s write up on piggy banks and choose the very best model available.

I am also expecting a significant part of my retirement to come from EPF. I must, must remember to follow this advice!!!

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7 Comments for “Can a windfall really change people’s lives?”

On February 20, 2008
At 11:30 am

First, this is a lovely new blog!! :)

I agree that most people getting such an amount won’t know how to handle it right.

What my dad ended up doing when he was laid off with a year’s salary was (after he found a new job) using some of it to take us to Europe. But he didn’t do that until he had a new salary to depend on. And some went into savings too.

by Patrick
On February 24, 2008
At 11:11 pm

I think a windfall can change people’s lives, but ONLY if the person is willing to change his or her financial habits. Otherwise, it can actually leave them in a financial state that is worse than their previous state.

On February 25, 2008
At 12:02 am

@ Mrs. M, Thank you. You always say the nicest things.

Looks like your Dad must have looked forward to giving the family a major treat. And still he waited till the new job was lined up.

@Patrick

You are right, of course. The concern is exactly what you have said in your qualification, Having the right financial habits. This is why so many lottery winners go back to where they were before financially or even worse.

[…] Managing a sudden receipt of a large sum of money is not easy. If we have the “monthly paycheck” mentality, chances are good that this windfall could be spent off quicker than we thought. Fathersez answers the question, “Can a windfall really change people’s lives?” […]

On February 27, 2008
At 12:49 am

Fathersez,

Consistent with the Reader’s Digest statement, it seems that most large lump sum lottery winners spend all their winnings in 3-5 years. I don’t remember the source.

On February 27, 2008
At 7:16 am

You are right, Super Saver.

In fact, I remember reading in FMF or GRS, that someone once recommended that life insurance proceeds should not be given to the benefeciaries in one lump sum.

On February 28, 2008
At 1:34 am

[…] Can a windfall really change people’s lives? @ Father Sez […]

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