It seems that Emergency Funds get all the press when it comes to unexpected money events. It makes sense, I guess. Most of us probably feel that bad things are more likely to happen in our financial lives than good. Not to mention that a few psychological studies show that we tend to twice as instensely to financial losses than we do for financial gain.
Still, I’ve felt like everyone should have a plan for when they unexpectedly receive money; or, a windfall plan, if you will.
So far, the only personal finance book I’ve read that covers the subject at all is Ramit Sethi’s “I Will Teach You to be Rich”. I won’t spoil the details of his plan for unexpected income here. I encourage you to check out the book; I thought it was pretty good.
As for my version of the plan, I pattern after something I heard while attending a seminar on real estate investing. I never actually got into real estate investing, but I did come out with a framework for planning around receiving some “above and beyond” kind of money.
What is a Windfall?
So, what do we consider a “windfall” in terms of this plan?
It can be a lot of things, really. Here are a few examples:
- If you work for an hourly wage, do you have a period of time where you might be offered a lot of overtime?
- I wouldn’t consider a small amount (say, a few hours here and there) of overtime a windfall. For that, you might just speed up the execution of your plan, or you could set that amount aside in a high-yield savings account until your windfalls add up.
- Do you get periodic bonuses at work?
- A big commission if you work in Sales?
- For commission work, maybe postpone enacting the plan to make sure your big commission didn’t come at the expense of future income.
- If you’re paid bi-weekly, I might even count the extra paycheck you receive twice a year for a windfall.
- Note that you will need your cashflow management system (aka “budget”) to be based on 2 paychecks per month rather than a monthly average for this to work.
- And, of course, tax refunds.
So, now that we have a few examples of what a windfall could be, let’s get started on the Windfall Plan.
Step 1: Be Selfless (Give away at least 10% of the windfall.)
Find someone who needs the money more than you do, and give it to them.
If you’re trying to pay off a lot of debt, this step may seem like a bit much. But, you just received money above and beyond your normal income, and you possibly didn’t even expect it. Not everyone has that experience. No matter how hard you think you have it, there is someone somewhere that’s having a tougher go of things. Help them out in some way.
If you’re a little hesitant about carrying out this step, just enter search “benefits of giving“. You’ll find numerous studies have linked positive impacts in health and self-esteem to generosity. Not to mention, your example might just spread to others in your community.
- If you belong to a religious organization, your place of worship.
- Local Food Bank or Homeless Shelter
- Local Medical facility (help pay somebody’s copay)
- A local school or school system
If you’re unsure of how to donate, just visit their website and start a chat. Or, perhaps, give them a call.
Step 2: Be Silly (Buy something you otherwise wouldn’t.)
(Note: If you’re paying off some large, non-mortgage debts, you will want to limit the amount of money in this step, or even skip it altogether.)
It’s time to open your mind up to possibilities here.
What I mean by being silly is to buy something that you would only buy if money wasn’t a big concern. This step is to whet your appetite for the finer things in life by doing something you don’t normally get to do (or, maybe, spend some money on an “I would never” item or activity). Basically, get a taste of something and use the experience as motivation to increase your earning and make today’s silly items a bigger part of your future life.
It might be difficult to come up with something if your windfall isn’t a particularly large amount of money. You might choose to save this amount. (You can choose how much, here; just make sure there’s some left over for step 3.)
What you choose to spend the money on is up to you. For smaller amounts, it could be buying an appetizer or dessert at a restaurant (another tip of the cap to Ramit Sethi’s “Rich Life” concept). For larger windfalls, maybe it’s getting nicer seats for a sporting event or upgrading for flight or motel.
Plan ahead for what kind of silly spending you want to do for different amounts of windfalls.
Step 3: Be Strategic
After you’ve given something away and spent a little bit on life’s little (or not so little) luxuries, it’s time to get back to working your plan.
With the money you have left over, you can get back to paying off debt, save more for that trip or other big event you’ve planning for, or increasing the amount you have in an investment account (Traditional IRA, Roth IRA, or maybe a taxable investment account if you’ve progressed that far in your plan).
What Percentages do I Use?
There’s really not a right or wrong way to split up the money you’ve gotten from a windfall.
When I was paying off debts, I liked to use a 10/10/80 approach. Now that the debts are largely gone, I might go 25/25/50. You may want to use 15/30/55.
Use the money however it fits your personality, values, and situation. The important thing, really, is that have a plan and you execute it.
Thank you for visiting Finunciate. Come back, soon.