What would you do with a million dollars right now?
On the surface, a million dollars is a lot of money. It’s the amount of money that a typical person working over a 28-year period will make in the US since the annual median salary was $35,977 as of 2019.
A million dollars is a lot of money and can set you up for retirement. A million dollars can buy you a lot of things. A million dollars can afford you the ability to live some experiences that you may not have had the chance to previously.
Many research studies have shown that people who make more money or inherit more money will spend more money, so what would happen to a typical person who has never seen $1 million and may have never expected that they would come into that kind of money?
Is a million dollars what it used to be? Below is a line graph that shows inflation figures over the last 20 years relative to certain household expenditures, which does not include the most recent inflation increases in 2022. While the graph shows that average hourly earnings have increased, a number of big-ticket items have become more expensive at a much faster rate.
Source: www.howmuch.net
While housing prices appear to have become inflated less than average hourly earnings, median housing prices in certain parts of the country average more than a million dollars. The National Association of Realtors indicated that the median US housing price was $320,000 in March 2020.
Automobile costs appear to have not increased with inflation, which either means that automobiles are not as profitable or that the cost has risen solely due to increased component costs.
What Someone Would Do
The rest of the article will lay out what I believe the majority of people would do with $1 million dollars of unearned money – money that they won in a contest or lottery, or that they inherited. I am also going to assume that there are no taxes on the inheritance or winnings.
According to the Federal Reserve Bank in Q3 2020, average household consumer debt was $145,000 and median consumer debt was $67,000. This debt includes mortgages, credit card debt, automobile debt, and personal loans.
I don’t have data to support this, but I believe that most people try to do the right thing, so I am confident that most people would pay off their debt. So let’s assume our individual decides to payoff their debt. If we assume that they have the median amount of consumer debt, then they will pay off $67,000 leaving them with $933,000.
The next thing someone would do is go out and buy a house for their family. With a medians US housing price of $320,000. Most people would likely want to upgrade their status and neighborhood with the winnings, so you could easily expect that someone would spend at least double the median housing price to upgrade their lifestyle. However, we will continue with the thread that we have a somewhat rationale winner where we can safely assume that our million dollar winner would at least buy a house for $320,000 leaving $613,000.
Many people view cars as a status symbol. I am not one of those people, but I do know many people who enjoy cars. According to Kelley Blue Book, the average new car price is $38,000 in 2020. With the average household size being 2.53 in 2020, we will assume that our winner wants to buy two automobiles. I do not think that someone who won $1 million would actually buy an average priced car. I feel like they would buy a luxury car at a minimum and maybe even a high end car. However, I will use the average car price for our calculation. If we assume that our winner spends $76,000 on two brand new cars, our winner will have $537,000 left.
Despite paying off personal debt, I am confident that people will do splurge spending for goods that they have always wanted – a Rolex, a Gucci handbag, an updated wardrobe, jewelry, furnishings, and home goods. Depending on the items needed, this could easily run $50,000, $100,000, or more. We can assume that the rational spender spends $50,000 for furnishings, home good, and desired items while the likely spender may spend $100,000 or more.
The thing that will happen that is out of the winner’s control are the attitudes of family and friends. Many people will be asking for a handout thinking that $1 million will last forever since they have likely never seen $1 million either. Many people who received $1 million may feel obliged to “help” family and friends who have not been as fortunate. This is a fallacy because once the winner starts helping, where will it end? It ends with the winner broke and likely without any improved skills to earn $1 million in the same fashion.
The rationale spender may feel obliged to give, but they would likely give less. The likely spender may end up giving too much, but I think that we assume that the rational spender gives $50,000 to family and friends. The likely spender will likely give $100,000.
The rationale spender could still have $437,000 leftover for investment. If we assume they keep $100,000 in their bank account, they could still invest $337,000 in passive real estate or the stock market. If they can earn a 7% annual return, the rationale spender now becomes a rationale investor who earns $23,590 per year in passive income.
On the other hand, the likely winner only has $13,000 leftover to invest. They have an expensive house, cars, and a number of material possessions. They could get a loan on their house, but then they will have a mortgage that they have to make payments on.
The table below shows the breakdown of what a rationale winner might do and what I believe would be the likely spending of someone who wins $1 million.
| Item | Rationale Spending | Likely Spending |
| Debt Payoff | $67,000 | $67,000 |
| Purchase Home | $320,000 | $600,000 |
| Car Purchases | $76,000 | $120,000 (2 luxury cars) |
| Wants | $50,000 | $100,000 |
| Family & Friends | $50,000 | $100,000 |
| Balance | $437,000 | $13,000 |
While we did not discuss taxes, many people who won $1 million would also have a tax bill, but they may not understand that until tax time. If they went on a shopping spree, they may not have enough leftover to pay for the bill. That could create a downward spiral where they have to sell belongings and assets at a loss to pay the tax bill.
Furthermore, even if people were able to stay in the Rational Spending zone, many people wouldn’t know what to do with $437,000.
The big problem is financial education in the US. People are not taught about money and personal finances. People are not taught about investing or debt. People are not taught about one of the most powerful concepts in the financial universe, which is compound interest. And unless they have a need or desire to learn about finances, many people do not seek out the knowledge that they need to be wise with their finances or investments over the long run.
In a future article, I will discuss what I would do if I won or inherited $1 million (and I will make the same assumption that the $1 million is net of taxes.
Until next time, let’s continue growing our cash flow and net worth together!
-Robert