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Unexpected Income: What Should You Do With a Windfall?

This article was written by in Money Management. 33 comments.


This article is presented by Kelly Whalen, Consumerism Commentary staff writer, who hosts a weekly internet show called the ¢entsible show.

Unexpected income is a problem many people would love to have, but it happens more frequently than people realize. Whether it’s a $20 birthday check from your eighty-something grandmother or a raise, there are few months we don’t have something unexpected.

When you get a windfall you could dream up many ways to spend or save it, so it is important to have a plan.

One-time income

You may find yourself with one-time income when your receive rebate checks, tax refunds, or birthday money, or if you sell something you own. Unless you are like Ebenezer Scrooge you’ll probably have the urge to spend some of this extra cash. The best way to deal with extra cash is to prioritize.

If your windfall is under $50, it’s a good idea to use this as fun money. $50 doesn’t go very far when you try to split it up, and unless you are $50 away from a savings goal or debt repayment, it will be pretty painful to put it away.

If your windfall is over $50 but under $100, put it towards debt. If you don’t have any debt use this as a little boost to your savings goals. If you have a favorite indulgence under $5, perhaps a hazelnut latte or a particular gum, spend a little on that so you don’t feel completely deprived.

If your windfall is over $100, plan to split it between spending and savings (or paying off debt). A good rule of thumb is to use a 50/50 split, though in some houses, like mine, that may be a 50/25/25 split.

If your windfall is over $1,000, I would highly recommend using it to (in this order):

Windfall

Regular unexpected income

Whether your side business suddenly takes off or you get a raise from your job, careful planning will keep you from lifestyle inflation. Lifestyle inflation is an increase in cost of living corresponding to an increase in salary. No matter how much extra income you earn, you need to have priorities.

If you are in debt, paying off your debt should be your first goal. Do whatever you can to make that happen as quickly as possible. The easiest way to pay off debt is to have your money automatically deducted from your checking account the day after your paycheck arrives.

If you are out of debt, or have a comfortable amount of debt (many people consider a mortgage comfortable debt), you should consider saving all of your dough. It’s unlikely you will miss your hard-earned cash, because you are already accustomed to living within your means. Choose your own order of savings, but I highly recommend using the following order:

If you are already doing all of the above, you should consider using your leftover money to fund other investments.

If you are out of debt, maxing out all your retirement options, funding your children (or future children’s) college investments, and have a healthy savings account, you should consider any other income that isn’t accounted for your do-as-you-wish money.

How do you deal with unexpected raises or revenue? What do you do when you get an extra $100?

Photo: ervega

Published or updated March 3, 2010. If you enjoyed this article, subscribe to the RSS feed or receive daily emails. Follow @ConsumerismComm on Twitter and visit our Facebook page for more updates.

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About the author

Kelly is a mostly stay-at-home mom to four kids. You can more of her articles about personal finance at The Centsible Life. Also, you can follow Kelly on Twitter. View all articles by .

{ 16 comments… read them below or add one }

avatar Ray @ Financial Highway

If you are in debt definitely pay off the debt, however if you do not have a debt and been financially responsible otherwise use the money to have some fun. Go on a trip or buy something you wanted for a while, I don’t think we have to do the “right” financial thing all the time, sometimes just treating yourself with a windfall is just fine.

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avatar Financial Samurai

Is it just me, or am I the only one who likes to go to Vegas and put a stack of black chips on black and let it ride? Just kidding.

Some good price breaks there Kelly, although anything less than $1,000 is always saved in my household… i.e. it’s reverse. It’s when the windfall is much more than $1,000 when I start using the funds to spend on things I need or pay down debt or what not.

What if you got a $10,000-$20,000 windfall?

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avatar Kelly

I guess there are no real hard and fast rules, you just have to make yours up and stick to them!

If you are debt free and get a big windfall, I would recommend splitting it in half. 1/2 to savings, and 1/2 to spend. What would you do with 10K?

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avatar Financial Samurai

Every time 10K hits the bank account I have an auto flush to savings or to my freedom fund. But, since that’s the case, 10K is not a windfall. If I got a 100K or more, I would probably use 70K and lock it up in a long term 4% CD, 20K for investments, and 10K to pay off rental prop debt.

Maybe I’ll use $2,000 to go on a short 5-7 day vacation somewhere.

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avatar steveDH

I would use it just like any other income. If you have a 15% saving rate put 15% into savings. If your debt load is 20% of your income, put 20% of it against your debt. Spend the rest on a “want”.
BTW: I couldn’t help but laugh at the sub-heading “Regular Unexpected Income” If it’s regular why wouldn’t you be expecting it? Kind of like a company playing with recurring and nonrecurring earnings or charges. No offense – just struck me as funny.

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avatar Kelly

I know it’s a bit of a misnomer, but my Dad always taught me not to count on money until it was in my hand. So until it becomes regular you can’t count on it.

A great example of this is a side business that you do that becomes a regular part-time job.

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avatar Yana

I do the same thing with all income. I put it in the bank unless it is small cash. I don’t think I have to “do” anything with it. It’s money to have and it is used when needed. Getting an extra hundred dollars doesn’t make me think I have to change my behavior.

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avatar Steve

out of debt – check
maxing out all your retirement options – check
have a healthy savings account – check
funding your children (or future children’s) college investments – to do

My wife and I don’t really make a connection between income and outgo (though sometimes we do so deliberately if the money was a gift). Both my wife and I are natural savers/non-spenders so we’ve never had a problem with spending more than we earn. We just put all our money, expected or unexpected, in our checking account. If we build up too much in my checking account I move it to our savings account, and if too much builds up there ($5k or so) I move it to our after-tax brokerage account.

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avatar Yana

Steve, that is exactly what my husband and I do with the account where his pay is direct deposited – when there is “too much” (No such thing, really. We make up what is too much) we move it to savings.

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avatar thisisbeth

We got a 2% bonus this year. After taxes, 401(k), etc., came out, I probably put about 3/5 into savings (mostly short-term; I have accounts such as “trips”, “charity” set up, so when opportunities arise, I can go without going into further debt) and 2/5 towards my credit card. Whereas, my Christmas gift from my grandma ($100), most went to extra memory for my computer, and the rest went to paying off debt. As it was a gift, I wanted something to go towards a “want”, rather than all going towards debt.

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avatar Erica Douglass

It’s interesting how different money is to people. In many developing countries, an extra $100 would be a way to feed your family for a month, or do major house repairs.

To me, an extra $100 is almost meaningless. And I know most people in the world do not live in that reality…but when I get an extra $100, I don’t even pay attention to it.

$1000+ is more interesting; that’s when I start making plans for it. I rarely spend it on anything personal, though. If my business gets $1000 I have plans for spending it on labor.

As your income goes up, you’ll find that the dollar amounts you care about change. It’s something that I didn’t expect to happen, but it did, and the change in perspective is interesting.

-Erica

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avatar Roshawn Watson

I agree that the amounts that we care about is highly variable. I remember at one point when getting a $100 bonus to sign up for something felt like I was getting a great deal. Now, the time and hassle-factor involved often makes that “windfall” less desirable.

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avatar Kyle

Is spending it on beer an option? Really, really nice beer?

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avatar Abigail

I like Liz Pulliam Weston’s idea of 10% — when you get a windfall, that’s what you get to keep for fun money. (On amounts like $50, we usually just throw it at debt.) This way, you get a small splurge but you still feel responsible.

That said, when Tim receives birthday money, he is allowed to spend it. And when I received birthday money (and was tempted to put it toward debt) he urged me to get myself something just for me. I did and it was very nice! So I think that’s the newest rule: birthday money is free and clear!

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avatar Ken

I like the previous comment about 10% for fun….who doesn’t deserve a little room to live it up….I would use the other 90% to: 1) Fund an emergency fund equal to 1 months expenses; 2) Pay off debt; 3) Open a retirement account (with any left over)…OR add to an already existing retirement account.

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avatar Ricky

I am 63 years old and have lived on about 20,000/year for ten years. I have just come into trust income of about 200,000 and I want to manage this for lowest taxes with adequate income. There may be more to come, but I want to plan as though this is one-time only. Complicating this picture is that I am delinquent on income taxes for several years. Do I hire a CPA? an estate planner? Is this windfall at risk because of my tax delinquency? and, how can I minimize that impact so that I am not left with nothing?

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