What Would You Do With a Cash Windfall?

What to Do with a Windfall

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in General

This question is kind of fun, but the answer to it can reveal how we think about money at the deepest levels. Budgeting paychecks is a matter of necessity; we have a certain amount of income that needs to be allocated to cover a certain level of expenses.

When it comes to windfalls however, options enter the equation. Unlike “have to” situations, we have some flexibility, and it’s in those options that we discover how we think about money and even how responsible we really are when it comes to handling it.

Some common windfall sources include:

  • Bonuses
  • Inheritance
  • Unusually large commission checks
  • Family gifts
  • Large tax refunds
  • Sale of an asset

For our purposes, let’s assume that the amount of the windfall is at least $1000, so as to be meaningful, but less than $20,000, which for most of us would keep it from being a grab bag large enough that we wouldn’t have to make hard choices.

What would you do with it, and what might that say about your attitude toward money? Would you”¦

Payoff Debt

This eliminates both a debt and the monthly payment on it. You’re using the windfall to improve cash flow, and to set up a future stream of smaller windfalls from the monthly payments you no longer have to make. This is like a gift that keeps on giving. You see money as a means to eliminate pain.

Spend it on something you really need

There are all kinds of possibilities here, but hopefully you’ll lean in favor of buying something that can provide a long term stream of recognizable benefits. Exercise equipment might be one such purchase which can reap dividends for many years. Replacing an outdated computer system is another, since it’s practically impossible to be a vital part of the 21st century economy without a good one. It’s likely that you see money as a means to improve the quality of your life.

Save it as an emergency fund

By saving the windfall, you’re keeping your powder dry in case of an unforeseen emergency. This type of allocation may not feel good in the short run, but there’s much to be said for having a sufficient amount of money salted away that you can sleep better and worry less. There’s a good chance you see money as a form of insurance to insulate you from disaster.

Invest it

Since it’s found money, you try to make it bigger by putting it into an investment vehicle that will enable it to grow and provide an even bigger windfall in the future. Maybe you’re investing it in an attempt to grow it until it’s large enough that it will enable you to buy something at a later date that the windfall isn’t large enough to cover. Like paying off debt, investing a windfall produces a gift that keeps giving. You’re comfortable with delayed gratification and see money as a tool to earn still more money.

Spend it on a good time or buying something fun

Since it’s found money that you can live without, you spend it doing something or buying something that will bring you pleasure. You mostly see money as a means to do what you like, or you’re an incurable optimist who expects a steady stream of windfalls in the future.

No real plan, you just roll along and see what happens

It may sound crazy to include this in the list of possibilities, but sometimes with some people, there is no plan. The windfall is just folded into the regular budget, and you live better for as long as the windfall lasts. When it’s gone, you simply go back to business as usual. You probably have a casual attitude toward money, and it mostly comes and goes in your life.

If I had to choose one over the others, it would be to bank it. Not only does this provide increased liquidity in the event of an emergency, but it also enables you to defer spending it until you have a purpose that’s truly out of the ordinary. There’s always a tendency to think “what will we spend it on” when a windfall comes in, but perhaps it doesn’t need to be spent, at least not in the short run.

We can all come up with a nearly infinite list of wants and needs to spend money on now, but if we think of windfalls as manna from above, perhaps it’s best to hold them for something truly special, something that will make a difference in our lives.

What would you do with a windfall? Any of the above, a combination, or maybe something not listed so far?

Kevin At Out of Your RutThis post is from FiscalGeek staff writer: Kevin Mercadante. I’m very excited to have him contributing to the site. You can find out more about him at his own blog OutOfYourRut.com.

(Photo courtesy of Amagill )

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{ 35 comments… read them below or add one }

Kevin 2010/06/02 at 5:45 am

A couple of years ago I would have blown it all. Today I would most likely put it towards an emergency fund and savings.
It’s amazing how your priorities change as you get older.

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Khaleef @ KNS Financial 2010/06/02 at 7:48 am

I would fully fund our first emergency account and then use the rest to pay off our primary credit card.

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paul 2010/06/02 at 9:15 am

This is all part of getting your finances in order in my mind. I’m definitely with Kevin I would have totally blown this a couple of years ago. But now it would just fall seamlessly into my overall plan. I’d give 10% of it away, then I’d blast out the rest of my full emergency fund, fund $2000 each into the kids Coverdell ESA’s for 2010, reserve some of that money for our trip to Australia and then the rest would go on the house.

I think we all fall into the trap that hey it’s a windfall so I might as well blow it! If you got a raise at work would you do the same thing? Regardless of where your money came from it makes good sense to treat it the same.

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Spedie 2010/06/02 at 10:53 am

This is an interesting article and one that I can relate to because of my very recent, personal experience. I have had a budget since I was about 15 years old. I am about to turn 47 years old soon, so I’ve been doing a budget a long time.

I am almost debt free. I owe on my house, which is a 15 year fixed rate that I am working to pay off early.

I have a 14 month fully funded emergency fund, and have had that amount for about a year and a half now….

Two months ago I had a $10,800 windfall due to a $3K tax refund and other strange things that happened. Two weeks ago, I got a $795 windfall on top of that. Yesterday, I got just over another $1000 that seemingly came out of nowhere. These are examples of some of the money I received.

I did not sell anything to make up the rest of the money.

What I decided to do was beef up some of my categories that I don’t have beefed up right now. For example, my auto deductible is $1000, so I put $1000 in that account on paper. I also bought a 1 million dollar umbrella policy. I saved $4,000 of the money. I put $1000 of it into investments, which for me, was my very first purchase of a single stock. I also saved for my medical deductible for this year. Anyway, I am sure someone reading this gets the idea of how I allocated it.

I chose to insulate my life from more disaster’s happening. I won’t have to touch my emergency fund for a car accident, etc.

I did not buy clothes, buy furniture, or otherwise treat myself. Treating myself against the storms of life is what I chose to do with all this cash.

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Kevin 2010/06/02 at 2:46 pm

Spedie, there’s nothing wrong with insulating your life from disaster–it frees up your mind and your time for other things. You sound like someone who’s made your money plans based on real life experience–that something actually can go wrong. I’m impressed with what you did previously, and what it is you’re doing now with the windfall.

As I was reading your comment however, I was thinking about something else in a bit of a different direction. Your finances were already well ordered, and money came in–somehow that’s how life seems to work. And because you have a solid foundation, the windfall is leading to an even stronger financial position.

I don’t know if money tends to flow in when things are going right in life, or if it just seems more noticeable in the hands of the financially savvy! Perhaps it’s that when money falls on those in distress, it tends to disappear into their circumstances, as if it never came in at all.

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Spedie 2010/06/03 at 7:56 am

True Kevin! I have seen others get windfalls. For example, my brother got $4K when my grandparents died. I was the only child not to receive anything. (I had a tendency to piss my parents off!) He is no better afterwards than he was before hand.

It does seem that those with their financial house in order also seem to have many other aspects of their lives in order. I have a neat and orderly house. I am losing weight without effort. These are some of the examples.

Just yesterday I walked out to my mailbox. I looked at my house from the street. It is the nicest house on the block….very well kept.

Financial order leads to other kinds of order also.

Budgeting in the Fun Stuff 2010/06/02 at 12:55 pm

Since we’re spending most of our cash reserves to pay off our remaining car loan this month, any windfall would go into our emergency fund.

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Kevin 2010/06/02 at 2:47 pm

Wow, most of you would put a windfall into an emergency fund! When I wrote that as my preferred choice, I thought I was being…boring!

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Daniel 2010/06/03 at 6:21 am

I have a decision like this to make. I can either pay off a quarter of my debt, save it, invest it, etc. The only problem with paying off the debt is that I’ll still have to make similar monthly payments an I’m afraid I won’t feel the effects.

I feel safest knowing I’m ‘losing’ less than a percent (low interest rates!) and that I’ll have the money available when I need it.

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Kevin 2010/06/03 at 7:12 am

Hi Daniel, this is my own thinking for what it’s worth. When the options look a bit complicated, bank it. Spend a good, long time thinking about what you’ll do before you do anything.

Who knows, maybe another windfall will come down the pike in a couple of months, and then you’ll know exactly what to do.

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Khaleef @ KNS Financial 2010/06/03 at 8:08 am

Great advice! Too many times it can be easy to shoot off canned answers without considering the subtle differences in everyone’s financial situation.

I think taking time to make the decision will be the best thing for you to do, Daniel. Especially if you already have a plan that you are following, and you have the discipline needed to pull it off.

paul 2010/06/03 at 10:00 am

Myself Daniel I’d tell you to blast it at your debt absolutely. I can tell you after working really hard and getting crazy intense having that debt gone is one of the most liberating experiences of my adult life. Even if you aren’t able to pay off all of one debt, create a sweet spreadsheet graph of your progress, that helped my wife and I greatly. Just my two cents on the matter.

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Samer Forzley 2010/06/03 at 8:37 am

Excellent points and great articles.

My 2 cents, and I truly believe that, is you gotta give as well, so make sure you give a portion to a worthy cause

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Khaleef @ KNS Financial 2010/06/03 at 9:02 am

Excellent point. That is a large part of the motivation for me to pay off my debt – then we will be free to give! But I do agree that giving should be a part of the windfall distribution as well.

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Money Smarts 2010/06/03 at 10:37 am

Like some of you i’d take the money, give away 10%, and then since we already have an emergency fund I’d use the rest to put towards our retirement accounts til they were maxed for the year. after that I’d probably make some extra payments towards our mortgage. Exciting!

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Margot 2010/06/03 at 12:13 pm

I’m in the process of growing my emergency fund. I had the choice of paying down my debt faster or saving for the unknown. This year the goal is saving for the unknown. A nice windfall would mean I could do both! Top off my emergency fund to meet this year’s goal early, then attack the debt 6 months earlier than I’d planned. That would feel so good!

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Kevin 2010/06/04 at 1:50 pm

THERE’S a PLAN!…Now all you need is the windfall! ;-)

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Jenna 2010/06/03 at 3:55 pm

I would put it toward the down payment of my future home. So buy something I really need / invest it I guess are the categories for me.

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Kevin 2010/06/04 at 4:52 am

Jenna, a down payment on a house would have been an excellent category by itself–thanks for bringing it up. As you say it’s both an investment and something you really need at the same time.

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Jenna 2010/06/04 at 12:20 pm

Ha! Glad you liked my suggestion. While I don’t think a home is something you NEED (shelter maybe) but definitely something I want to have soon.

Austin 2010/06/03 at 6:09 pm

I would first put it in a savings account for 1 month while I decided what to do with it.

But I’ll speed up the thought process and say spend 1-5% on a vacation of some sort. I’d also donate 1-2% to a couple charities. I’d split the rest between an awesome emergency fund and a house down payment. If a lot was left over I’d probably buy a guitar too ;)

Austin @ Foreigner’s Finances

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MyFinancialObjectives 2010/06/03 at 7:12 pm

Hmm… with $1000 I’d pay off debt. With $10000 I’d pay off debt. With $20000, I’d……..buy a brand new car!!!!!!

No, no….. I’d still pay off debt… :)

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Budgeting in the Fun Stuff 2010/06/03 at 7:56 pm

MyFinancialObjectives, you got me for a split second. Thanks for the giggle.

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Jerry 2010/06/04 at 6:26 am

I think I would definitely invest and save in hopes that the investing would lead to even more money. If I didn’t do something immediately with it I think I would blow it too easily. My only insurance for keeping the money intact is probably using a financial planner that I trusted.

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Kevin 2010/06/04 at 1:55 pm

Jerry, that’s a great point. Good financial management doesn’t come easily or naturally for a lot of us. The best way to deal with that is to find some way to take some of the decisions out of our own hands in favor of a discipline that will make it happen with minimal input from us.

Payroll deductions is one way, adding a “gatekeeper” takes it a step further. Finding someone you can trust who’s actions are aligned with our objectives–that’s where things can get complicated.

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AJ 2010/06/05 at 7:41 am

This just happened to us! We got a random $3,000 scholarship that we didn’t apply for or even knew existed. Right now the plan is to give 15 percent away, use 35 percent for my hubby to take an online masters course, and use the other 50 percent towards debt. We have been chipping away at over 50 grand in student loan debt for the last 19 months and hope to pass the halfway-there mark very soon!

One cool part about unexpected money is that it doesn’t really feel like it “belongs” to you, so it is much easier to give away and use for debt payoff. It is a lot harder to give freely of the money God blesses us with when I start to selfishly feel like I should get to do exactly what I want with it since I “earned” it:)

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Money Reasons 2010/06/05 at 8:52 am

Hmmm, I think I would split the money between all current funds.

So…:
Some would go to the mortgage payment (if I had one, I’ll say a future mortgage payment)
Some would go into my roth IRA (since I have earned income already)
Some would go to my kid’s 529s
Some would go into one of my stock dividend funds (especially now that the market is down again)

BUT, some would also go for either a “fancier than Taco Bell” dinner or to take the kids to an amusement park or something similar (fun money).

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Kevin 2010/06/05 at 10:40 am

Money Reasons – that’s a real thought, take a small amount and use it for a good time, then allocate the rest to a purpose that can make a long term difference in your life.

If you’ve been faithfully living frugally for a long time, having a night of it-feels-good-to-be-alive activity can be a real incentive toward the day when the debts are paid, the emergency fund is fully loaded and you have a few options.

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JoeTaxpayer 2010/06/06 at 9:10 am

This is one of those “Predictably Irrational” times, I suppose.
My pay is variable. My wife’s as well. About 1/3 of our income comes in the form of a quarterly lump sum. When that money hits our account we don’t treat it like a windfall, in the sense that most might. It goes to the same things that any income does.
401(k) off the top, check for upcoming bills due, see how IRA deposits are going, decide if mortgage wants to be paid ahead, etc. Why would I suddenly treat a random $10K windfall as any different from the money from my job? Did my goals suddenly change?
Any of Paul’s readers (Kevin’s post, but Paul’s blog) are likely to be in tune with their “number”, the retirement savings they’d need to quit their day job.
So in our case, the answer is no different from where the money goes now, and wouldn’t be right up the point where it’s enough to get us to our “number.”
(I take it back – I am finishing my basement, myself. The right windfall, and I’d sub out the drywall. Jane and Rainy-Day Saver/Nicole already convinced me to sub out the taping.)

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Kevin 2010/06/06 at 2:24 pm

Joe, it sounds as if bonus is a regular part of your income, so I fully agree, you wouldn’t treat it any different than other income. When I listed bonus as a source, I was thinking more in terms of the annual variety. I should have been more specific.

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JoeTaxpayer 2010/06/07 at 1:14 pm

Understood. if instead of quarterly, we got annual bonuses, I’d still handle funds the same. Anyone whose budget is so tight they view a windfall as something to be divided up and spent should send all of it right to savings. Anyone who already has a good savings plan would likely do this anyway.

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Azam Zaki 2010/06/09 at 9:30 pm

I will set a portion of the money to pay off debts . the rest i will put int the saving and less risky investment.

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JMK 2010/06/14 at 11:26 am

We have only our morgage for debt and are whacking that down as fast as possible. We live way below our income on about 55-60% of our take home. On a weekly basis I already skim off the excess after the pay is in and the bills are paid, and either contribute to our retirment savings or pay extra on the mortgage. Anything under $10k and I’d likely just split it between the same two and make a larger than normal payment that week. If it was more than $10k I might take a little off the top for a fun weekend or something with the kids and then split the rest for retirement and the mortgage.

Fortunately there’s nothing we feel we’re doing without, and we long ago wised up cleared all our dumb consumer debt from the days when we thought we needed everything and needed it now. These days, getting the mortgage paid off and our retirement accounts built up moves us ever closer to our early retirement goal date (December 2020). Our one splurge in a generally frugal budget is to travel fairly regularly as a family. Since saving for the next trip is already part of our budgetting I wouldn’t see any need to use an unexpected windfall for that. Getting the money working for us asap in our retirment fund or reducing the principle on the mortgage is more valuable than filling up the vacation fund sooner. I still have to earn the vacation days to use that so there’s no financial advantage to rushing the vacation fund.

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James 2010/06/22 at 1:24 pm

i would either save the entire windfall or i would invest it and set a goal to double it within 2 years.

i love to make and save money so for me i would make it a game and try to double it!!!

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Moneyedup 2010/07/27 at 8:10 pm

The first thing that came to my mind was to go back to school. I could spend my whole life in school if I was able to sustain myself, so if I came upon a windfall of money I would apply for graduate school. It would be something I enjoy and it would advance my career as well.

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