What to Do When You Receive an Unexpected Windfall
If you’ve ever come into an unexpected windfall—maybe a bigger than expected tax refund or a much-anticipated inheritance—you probably know that feeling of giddiness. It’s an exciting feeling, thinking of all the things you can buy, maybe a new car or that kitchen remodel. The problem is, that feeling won’t last long. Ever heard of the hedonic treadmill? The essential idea is that the happiness we feel after buying new toys doesn’t last. Soon enough, we feel exactly as we did before we got the new Porsche. It turns out that if you approach windfalls with that frame of mind (i.e. “what can I buy next?”), the money is liable to slip through your fingers before you know what’s happened, and with very little to show for it.
That’s why it’s crucial to come up with a rule for what to do with money that falls into your lap unexpectedly. A rule that you can follow when the cash seems to be burning a hole in your pocket. A rule that your future self will thank you for following.
Share, Save, Spend
Here’s one easy-to-remember idea: share, save, spend. This model is directed toward children and teenagers, but it works for adults, too. The general idea is you come up with a ratio for dividing your newfound wealth. This works for your salary raises, too. (For related reading, see: Teaching Financial Literacy to Tweens: Spend, Save and Share.)
For example, you could share (i.e. contribute or donate) 10% of every windfall. Another 50% of the windfall goes to saving for a variety of financial goals. That still leaves you 40% of that tax refund or other lump sum to spend as you like. And the best part? You’ll feel good spending that money, knowing that you focused first on two solid money moves: charitable works and saving for the future.
Writing Down Short-Term and Long-Term Goals
If you don’t like the share, save, spend approach, another way to devise a rule for any unexpected money is to start writing down your short- and long-term financial goals. (For related reading, see: Setting Financial Goals for Your Future.)
Writing down your goals—and revisiting that list frequently—really is a great way to help ensure you’ll achieve those goals. And one step better than simply writing down your goals is to make a detailed plan for achieving them. All you have to do is reverse-engineer your way to them, by writing down how much money you’ll need to achieve each goal, how many days of saving you have until you want to reach that goal and how much money you’ll need to save each day (or week or month) to get there. This type of exercise can be so motivating, you may want to throw all of your inheritance from Aunt Jane toward your future goals. If you’re unclear how to proceed on creating your financial goals, consider consulting a financial planner for help.
Finally, don’t forget some basic financial rules of thumb. For example, you may owe taxes on the money, so be sure to set aside some money for that bill. And if you don’t have an emergency savings account, use the money to fund one.
(For more from this author, see: The Cost of Tapping Your Retirement Accounts Early.)
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