Have you ever received a windfall? This would be money that lands on your lap unexpectedly, putting a grin on your face. It’s the opposite of what normally happens to us regular folks who often come across unexpected bills and costs that throw our budgets out of whack. Ever notice how easy it seems for bills to just come out of nowhere and pile up on your desk? And how it hardly ever happens that you chance upon a bunch of money with no strings attached? What I’m saying is that it’s much easier to become a target of a debt collector than it is to be the lucky recipient of free cash. That’s just life.
What Is A Windfall? Plus Human Behavior Towards Easy Money
Windfalls come in a few flavors such as an inheritance, tax refund, a lucky win (somewhere), a generous gift, a raise or a work bonus. Now here’s the thing. I believe that just as we all need an emergency fund to handle unexpected costs, I daresay we also need an emergency plan of some sort in order to address windfalls. People these days are quick to act on this free money without a plan, and many times, it becomes just plain disastrous to be holding on to a big chunk of change when you’re not prepared to deal with it. As easy as money comes in, it can also easily leak out. Just ask a lot of lottery winners who go broke in record time.
I actually have heard and read about what sometimes happens when people receive windfalls. Behavior towards free money can vary depending on your financial standing and situation. This is just my analysis, but I believe that those who tend to fall in the extremes of the economic spectrum may tend to be more rash about money. Why? Let’s see the cases:
Do you have a lot of money already? I would presume that rich people think of windfalls as pocket change. When the cash is not a big enough amount to make a dent in their lifestyles anyway, they’ll simply use that money like they do pocket change. They’ll spend it on something ridiculous and outrageous just because they can. Besides, amounts here are relative, especially when you think in terms of CEO bonuses.
Do you have no money at all? You’ll be surprised about this one. When people who are not used to having money suddenly get a whole lot of it, what do you think their reaction will be? Expect a lot of emotion and a lot of drama (good and bad). When you couple emotion with money, it can lead to a lot of fireworks (and maybe not the good kind). I have heard someone who was admittedly poor tell me that this is because those who lack money often feel like they need to “treat” themselves when they finally luck out a little. Can’t blame anyone who feels this way: feeling deprived can truly suck over time and feeling like you deserve a break now and then is natural human behavior.
So this leaves us with the need to try to prepare ourselves for those times when good fortune may smile upon us at some point. Have some kind of plan for the time when you may find yourself with sudden cash. Think twice before you implement the plan and if you’re going to get someone’s opinion, you better make sure they’re trustworthy.
Where Would I Use A Windfall Today?
Quite a long time ago, a money question came up over at Lazy Man and Money. It’s a three part series (Part 1, Part 2, Part 3) that asks what some of us bloggers would do if $50,000 just happens to fall on our laps.
Here’s what I said back then:
If I had an extra $50,000 up to $100,000 lying around, I’d probably use it to develop my business further. My spouse and I are both business owners so it would be great to be able to inject a little more money into our ventures. This would enable us to breathe a little easier and would allow us to stop worrying about financing. As another option, I would also consider adding this money to our second child’s 529 savings account. I believe that a lump sum investment can go a long way here because this kid is still pretty young. I’d be tempted to build a relatively more aggressive portfolio that included emerging market investments, REITs and US small caps for this purpose.
Well, a lot has happened since 2007, when I first wrote this about windfalls. For instance, the 529 account for my child has been taken care of, thanks to generous grandparents, relatives and Upromise! So today, I’d use a windfall of up to $100,000 to apply against my mortgage instead. We’re almost done paying it off and it would be absolutely wonderful if we can just get it over and done with. So if there is a spare $100,000 headed my way, it’s going to go to property payments. I doubt, however, that we’ll be the recipient of anything so desirable for a while.
There are also other great things I can think of doing with the bucks, such as earmark it for some home repairs for the next couple of years (invest in the house!), new furniture (it’s time for some changes) and most importantly, a new car (we’ve pretty much run our family van to the ground). Anything leftover can simply and quietly go towards our given asset allocation mix for our longer term goal of retiring early. What this demonstrates is that we all have competing goals for our money. In fact, if you give yourself a few moments to think about it, you’ll find that it’s pretty easy to think of things you can do with cash that you receive out of nowhere. It’s therefore important to prioritize your needs and wants pretty carefully before you go out on a spending spree. This is what I meant by having a financial plan in place before you go out and do anything with your money. It’s important to “sit on it” for a while whenever something changes for you on the financial front, especially if it has longer term ramifications for you and your family.
How Should You Treat A Windfall?
We are all at different stages in our lives but there are general guidelines you can use to figure out how to handle a windfall. In general, the best ways to treat unexpected money is to:
- Use it to first get rid of your debt or to reduce your credit card debt.
- Create an emergency fund by squirreling your windfall into highly liquid savings accounts or in a high yield free checking account.
- Fund longer term financial objectives like the goals to save for college or to save for retirement.
- Invest in an index fund.
- Pay down your mortgage or other “good” debt.
What I would be very careful about doing? Buying an expensive big ticket item that depreciates in value very quickly ;). If you’re thinking of going down this path, make sure you can justify this move.
Created: June 4, 2007. Updated: April 18, 2011
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