One of the more interesting issues in financial management is that of absorption: how easily can an individual, organization, or nation handle an influx of cash?
I’m involved with an organization called Impact 100 Chicago,. The members contribute $1000 each and then ask local organizations to apply for grants. The grant applications are reviewed, with the accepted organizations receiving $100,000 grants. This year, the city chapter made grants to three organizations.
One reason that many organizations are rejected is that they would not be able to handle a $100,000 grant. There are plenty of organizations in Chicago doing fine things that would really benefit from $10,000, but $100,000? We don’t want a grant recipient hiring someone this year and then having to fire them next year when the money is spent. We don’t want a big program expansion that has to shut down in a year because no more money comes in. It’s hard to look at group doing great things, know that they need funding, and see that it would be a mistake to give them $100,000.
It’s the same with lottery winners. Winning a million or less would be nice. That’s enough to pay off debt, buy a fancy car, take a dream vacation, maybe even send a few grandchildren to college. Life will be better.
Winning mega-millions, on the other hand? It’s generally a bad idea that throws life off kilter. It too often creates serious disruption in personal relationships, fuel the worst habits, and lead to irrational spending. It’s the proverbial dream that becomes a nightmare for many lottery winners.
Financial absorption is a problem in international development, too. Certain African nations have become kleptocracies because of huge influxes of cash from relief agencies and natural resources companies. The people in power don’t know how to handle that much money responsibly, and their worst impulses come out.
And it’s not just politicians raised in poverty and lacking formal educations who do stupid things with money. Start-ups run by engineers and MBAs raised in the United States sometimes receive more venture funding than they need and waste it on bad Super Bowl ads.
Non-profits, developing nations, start-up companies, and even ordinary people who play the lottery on occasion would all benefit from a little extra cash. But how much is too much? It’s a good financial planning problem to have, but it is still a problem.