How to make your windfall work for you
With the latest round of stimulus payments coupled with tax season, I have gotten a lot of questions lately about the best way to spend money you weren’t expecting to receive. With millions of people receiving refunds, I’m sharing the top 3 ways to prioritize unexpected money.
Most people fantasize about what they would do if they hit the lottery or received an inheritance. These fantasies usually include lofty plans like paying off debt, buying new homes, lavish vacations, or giving to charity. While not as lavish as winning $50 million in the lottery, the average person will receive unexpected money at least once a year. These windfalls typically come in the form of bonuses and tax refunds. According to Glassdoor.com employees can expect to receive annual bonuses of around $1,000. These bonuses are typically paid out in one lump sum.
Why you need a windfall spending plan
When we receive unexpected lump sums of money it is pretty darn exciting. Our minds race thinking about all of the things that we ever wanted to do with this money. It can be tempting to spend it on those first few things that come to mind. This can lead to wasteful spending and guilt once you calm down from the rush of making unplanned purchases. Putting a plan in place that fits your money goals and priorities, gives you the confidence you need to spend guilt-free.
Putting a windfall plan in place prior to receiving bonuses or tax returns is similar to completing a fire drill. By the time you reach adulthood, you have probably participated in over 50 fire safety drills. The act of practicing how to leave a building and how far from the building to stand become second nature. If an alarm were to go off right now you would automatically know how to get to safety quickly. Think of the windfall blueprint as your financial fire drill.
Create a windfall blueprint
Step two in this process is creating a windfall blueprint. The Windfall Blueprint is a formula that I use to divide your financial windfall aka “found money”. As you can see from the above graph, 80% of your found money is used for bills.
Typical bills would be anything that is past due, funding upcoming subscription payments, or paying bills in advance. 10% of the money would be sent to savings. Typical savings categories include topping off your emergency fund, adding to sinking funds, or adding to your retirement accounts. The remaining 10% would be used as “fun money”. Fun money, as I tell my clients, is money that you are able to spend however you choose. You could buy a new game, get the crafting supplies you’ve been eyeing, splurge on a full body massage, or a nice bottle of wine. The sky is the limit for your fun money spending.
The savings percentages used for this blueprint are not set in stone. Instead, use the 80/10/10 split as a starting point. Depending on your financial goals you may use other configurations like 90/5/5, 60/20/20, 10/80/10, etc. The most important thing is picking the found money blueprint that works for you then sticking to it. Now that you have worked our the plan that you want to use in your head you need to write it down. The act of writing your thoughts down is the first step in creating a new habit. Science has proven that physically writing things out creates new habit grooves in your brain.
Putting your plan into place
The final step to prioritizing unexpected income is adding it as a line item to your budget. Treat it as its own miniature budget within your regular budget. While it has its own percentage breakdown it is still part of your monthly spending plan. Once you know exactly how much money you will be receiving take your newfound windfall blueprint and map out the dispersal and continue with your regular monthly budget. The best part of this process is that if you are managing your budget monthly then this process should not take more than 10 minutes to implement.
If you are like the 60% of Americans who don’t have a budget don’t fret. I cover the budgeting process in a previous blog and you can review that here. Creating a spending plan that is aligned with your values is simpler than you think. Once you have a plan in place it will make receiving unexpected income a peaceful joy rather than a chaotic process.