Have you ever received a tax refund, stimulus check, bonus, or any other financial windfall, and since you weren’t sure what to do with it, you just let it sit in your checking account until it slowly drained away? Guilty! No matter how well you manage your money, without a plan your windfall is more likely to end up gone with the wind.
This week I’m sharing the recipe my husband and I use to maximize our financial windfalls. Having this recipe in place before any windfalls come pushes us to make sure we follow that recipe when we have the “ingredients” in hand. While you certainly don’t have to replicate our recipe, I hope today’s article gives you some inspiration to help you create your own:
A Sprinkle of Fun: I’ve had times where I’ve put all of my financial windfall towards a big financial goal (like my emergency fund or student loan repayment) and I’ve been left feeling a little resentful. Where’s the fun in that? Shouldn’t I be able to enjoy at least some of the extra money coming my way? This was especially true early on when my budget was a lot tighter and didn’t allow room for many “extras.” My husband and I decided we will use 10% of any financial windfall that comes our way to go out to a nice dinner, see a play, or buy something for our home that we both have been eyeing. It’s allowed us to celebrate our windfall without going overboard. Now that our budget has a little more room in it for fun, we’re less concerned about setting aside a specific percentage, but we always tend to do at least one just-for-us thing.
Tip: While those with a spender money personality may appreciate this approach, savers and givers are more likely to struggle with this. I encourage you to wade into the discomfort and do it anyway. It’s important to mark the occasion and enjoy the money that comes your way. The memories you make will be well worth the expense.
A Dollop of Generosity: As someone with a giver money personality, my first inclination when a windfall comes through my life is to give all of it away. While in many circumstances that just isn’t the right financial choice, I do think it’s important to share at least a portion. Early on, I started giving away 10% of any financial windfall that came into my life. If this feels like a high amount of money that’s eating into your spending or saving, you might start with a smaller percentage and grow towards a specific goal number. Think of this portion as a way to acknowledge your privilege and cultivate a sense of generous gratitude.
Tip: Not sure where to send the money designated for giving? Don’t let it languish in your checking account. Instead, put it in your savings account and designate it as a giving fund so the money is ready when you see the right opportunity.
A Hearty Main Dish: Now that we’ve had a little fun and given some away, it’s time to focus the rest toward one or two goals. How are you doing on saving up an emergency fund (at least $1,000 for the short-term and a plan to save up 3-6 months worth of expenses for the long-term) and paying off high-interest debt (debt with an interest rate of 10% or more)? If you’ve got these two goals out of the way, then consider what goals are most important to you. If your windfall is less than a thousand dollars, resist the urge to stretch this money too thin by putting it towards too many goals. However, if this is a large amount (like an inheritance), you can certainly spread it across more goals. Also, know that you don’t have to allocate all of this money right away. Instead, you might put the money into a high-yield savings account (if you’re hoping to use the money in less than five years) or even invest it (if you don’t plan to touch it for a while).
Tip: If you had to dip into your emergency fund this year to help tide you over, a financial windfall is a great opportunity to help you replenish the balance.