This is the 2nd in my series written to Facebook’s Pre-IPO Employees, the title of which is only partially tongue-in-cheek. I am a fee-only financial planner, and series offers new insights to Gen-X financial windfall recipients, whether that windfall came from stock options (congratulations on your IPO this week, Yelp Employees!), an inheritance, a big sports or entertainment contract, divorce, or lottery winnings.
February 26, 2012
Dear Facebook’s Pre-IPO Employees,
Sometime after Facebook’s IPO, pending some tax or market disaster, you’ll exercise your options, sell your shares, and be presented with a check. On that day, you’ll begin your exciting journey into the world that many consider the American Dream. Uncle Sam is throwing a big party for you next April 15th, and he’ll lighten your purse at that soiree, but you’ll likely recover from your hangover still a passport-carrying citizen of this new world.
Here, the game changes entirely. Money doesn’t often double or triple in an instant, but it can disappear faster than I can say “bad investment choices”—and for many, it does. In fact, the data on windfall recipients tells us that for the majority, it does.
You won’t feel it, but your new legs will be wobbly. You will make missteps, but they won’t seem like missteps at the time. You see, being rich consists of two distinct skill sets—the skills to get rich and the skills to stay rich. These two skill sets are very different, they require very different mindsets, and they rarely occur naturally in the same person.
If you plan to keep your passport to this new world, you will need to master the staying rich piece. Those who get rich slowly do so over time, learning lessons along the way. They research strategies and earn confidence based on success. They suffer regret and take responsibility for small-sized failures, so when the numbers get large and interesting they don’t repeat the same mistakes. They try out advisors, fire bad ones and hire better ones.
You don’t have this luxury, and to make matters worse, your brain is not your friend. You, like all of us, suffer from a myriad of cognitive biases, and because you’ve received a large financial windfall, now instead of making a $100 or $1,000 mistake, you’re likely to make a $100,000 mistake.
You’ll be more inclined to make large extravagant purchases or “investments” because you can, after all your discretionary spending budget just had 5 zeros added to the end of it. You’re likely to learn lessons more expensively than others. Don’t get me wrong, I’m all for learning life’s lessons. What I want to protect you from is learning these lessons at the expense of your long-term financial success.
Without the hard-earned skills to manage your wealth and stay rich, you won’t know the difference between discretionary spending and what should be untouched principle. You won’t understand the dollars and cents of what your financial windfall makes possible for you in terms of retirement, taxes, gifting, cash flow, purchases, spending and investing.
And I promise you—money is all dollars and cents.
And that’s the difference – right now that financial windfall lives in your mind like pictures of success and vacations and perhaps the envy and celebration of your friends and the public, but not simple dollars and cents.
Thanks, Facebook Employees, for listening. I plan to be your pen pal for a little while longer—there is much I would like to tell you. If you feel like you can I could be copasetic, become a subscriber and I’ll send my letters straight to your mail box.