Comments on: Unexpected Income: What Should You Do With a Windfall?

By: Ricky

Ricky — Fri, 09 Jul 2010 22:26:24 +0000

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?

By: Ken

Ken — Sat, 06 Mar 2010 13:33:46 +0000

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.

By: Abigail

Abigail — Thu, 04 Mar 2010 19:03:35 +0000

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!

By: Kyle

Kyle — Thu, 04 Mar 2010 19:02:14 +0000

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

By: Roshawn Watson

Roshawn Watson — Thu, 04 Mar 2010 18:29:52 +0000

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.

By: Erica Douglass

Erica Douglass — Thu, 04 Mar 2010 18:03:02 +0000

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

By: thisisbeth

thisisbeth — Thu, 04 Mar 2010 17:34:36 +0000

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.

By: Yana

Yana — Thu, 04 Mar 2010 17:20:41 +0000

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.

By: Steve

Steve — Thu, 04 Mar 2010 17:05:55 +0000

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.

By: Yana

Yana — Thu, 04 Mar 2010 16:26:18 +0000

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.

By: Financial Samurai

Financial Samurai — Thu, 04 Mar 2010 16:10:36 +0000

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.

By: Kelly

Kelly — Thu, 04 Mar 2010 16:02:53 +0000

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.

By: Kelly

Kelly — Thu, 04 Mar 2010 16:01:17 +0000

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?

By: steveDH

steveDH — Thu, 04 Mar 2010 15:33:49 +0000

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.

By: Financial Samurai

Financial Samurai — Thu, 04 Mar 2010 14:05:04 +0000

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?

By: Ray @ Financial Highway

Ray @ Financial Highway — Thu, 04 Mar 2010 13:07:24 +0000

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.