It’s it wonderful when you get money you were not expecting? A windfall where money almost seems to fall out of the sky into your hand. It almost doesn’t seem the matter on how much it is or how you get it. You still get that burst of excitement when you pick up that $5 bill on the ground or get a big bonus from your work.
Yet regardless of how you get the extra money just about everyone seems to have the same thought right after getting it: how do I spend this? Oh, should I get a coffee with this money or perhaps some donuts (mmm, donuts so sweet and…what was I talking about? Oh right). Which I do understand the reaction, but I should point out it isn’t a particularly healthy habit to have.
Why? Because you really should set some reasonable limits about investing some of your windfalls in life. This isn’t to say you should always invest all of your windfalls, but rather consider investing most of them. While I don’t have any particularly hard and fast rules about mine I do have some general rules of thumb regarding money that fall into my lap.
Rule #1 – If it is less than $20, do what ever you want with it. This rule then allows me to not bother tracking small amounts of extra money. Of course I could still invest the money, but I usually don’t for very small amounts. I generally just put it in my wallet and send it on something that catches my eye later on. I’m usually not in a rush to spend small amounts of found money.
Rule #2 – Celebrate your big windfalls (greater than $100). I don’t know about you but I once won a colour contest and got like $75 as a prize and that was a BIG deal to a little kid. So while I’ve adjusted the amount slightly upwards I still tend to celebrate windfalls. Now the term celebrate usually means I either buy something small or do something fun to note the occasion. My most recent one I picked up some beer ($14) on the way home and enjoyed a glass with my wife that evening. That’s it. Why? Because this allows me to get the buy something with unexpected money out of system and to note the occasion.
Rule #3 – Invest the vast majority of the money into your priorities in life. Now your priorities change in life but windfalls can provide a nice boost to what ever you happen to be working for in life. So if you are focusing on paying off the mortgage, then you make a lump sum payment. Or if you are going back to school, then you put the money towards your tuition. Or if you are saving for an early retirement, then you put that extra money in an investing account. The point here is to move things along a bit faster than you expected and then you really do appreciate the extra help of the windfall.
Rule #4 – Do NOT depend on windfalls. I used to have a job that I would get huge bonuses (I mean like in the range of $5000 to $12,000) ever quarter (if we met our targets). Yet I never lived off that bonus money. The mortgage was paid and our groceries bought with our tiny base salary, because I never spent or investment a cent of my quarterly bonus until it was in my bank account. Why? Because you can’t depend on variable money…what happens when things beyond your control take that money away? You end up borrowing money to keep going and you are breaking one of the core rules of money: don’t spend more than you have.
So those are my guidelines for windfalls, how you handle bonuses, tax refunds or 50/50 draws winnings?