The Investment Scientist

How Should a Facebook Millionaire Deal with Money

Posted on: May 21, 2012

Financial Planning for Facebook Employees

Financial Plan for FB Employees

My friend Sally has a friend who is a software engineer at Facebook. The recent Facebook IPO made him a millionaire, many times over. According to Sally, he is overwhelmed by this sudden wealth and wondering how to deal with this mountain of money.

I have a suggestion: put the money in nine buckets.

Let me explain. All you newly rich Facebook employees need is a framework to deal with your money. It is a 3 by 3 box. Horizontally, it is divided into Need, Want, and Aspiration. Vertically, it is divided into Short, Med, and Long.

Need, Want, and Aspiration

Need is money needed to pay for basic lifestyle needs. Most of you software engineers out there are not extravagant, so $60k a year is probably enough to pay for your basic lifestyle needs. You will need $2mm to $3mm there.

Want is money needed to buy a Lamborghini and travel the world every year. You don’t need a Lamborghini to live a good life, but you can afford it and you want to impress your girlfriend, so go ahead and budget for it. Just don’t buy one every year. You can probably set aside $1mm to $2mm for your lifetime Want.

Many Facebook employees have the aspiration to follow in their boss’s foot steps, that is, to start a company that changes the world. That will take some money. Some may like to be like Bill Gates, dedicating his life to giving his money away for worthy causes. After Need and Want are addressed, the rest can be put into the boxes for aspiration.

Short, Med and Long

Short is the timeframe of the next four years; Long is what beyond ten years and Med the time between these two.

Why divide money along the time you need it? Because you want to invest it differently. Money for Immediate Need, Want and Aspiration should be mostly in cash; money for Intermediate can be in a 40/60 portfolio and money for Long-term should be in a 60/40 or 70/30 portfolio.

Most important: Don’t keep all of your money in FB stock!

Caveat

The above is a stylized mental exercise. It does not take into account investment returns, nor does it take into account evolving lifestyle needs and wants. However, the framework helps you to think about the money and to avoid the mistakes of this entrepreneur who sold his business for multiple millions of dollar and yet found himself live in poverty in retirement.

If you need some help to do more rigorous planning, find a fee-only financial advisor near you, or schedule a discovery meeting with me.

Get my white paper: The Informed Investor: 5 Key Concepts for Financial Success.

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Author

Michael Zhuang is principal of MZ Capital, a fee-only independent advisory firm based in Washington, DC. He is also a regular contributor to Morningstar Advisor and Physicians Practice. To explore a long-term wealth advisory relationship, schedule a discovery meeting (phone call) with him.



You may also get his monthly newsletter, or join his Facebook page for regular wealth management insights. Michael's email is info[at]mzcap.com.

Twitter: @mzhuang

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