From smaller amounts like tax returns, work bonuses, and holiday and birthday gifts to bigger amounts like casino and lottery winnings, and inheritances, windfalls can come in a variety of ways and sizes. And knowing how to handle such income can at times be difficult.
In our own family, I've seen such windfalls used both wisely and wasted. Such experience has taught us how to be better prepared for such occasions, how to handle certain minor windfalls, and how we might one day handle a bigger one.
Sock it safely away and consider it savings
The first thing we typically we do with any sort of windfall is stash it in the bank and consider this money as part of our savings and/or emergency fund. We do this for several reasons. First off, the money is safe and secure until we make decisions regarding what to do with it. Second, by considering the money as savings as opposed to fun money or designating it immediately for spending, it makes it harder to spend if or when things settle down and we decide what to do with it.
Once we get our windfall, we tend to consider what financial responsibilities we have either outstanding or coming up. In our family, I've seen members use windfalls for a variety of things. For us, our most recent tax return was used to pay off our final birthing bills for our second child. Another family member used a small inheritance to pay off credit card debt, while another used a larger inheritance to pay off the remainder of their mortgage. In such ways, while they weren't saving such windfalls for a rainy day, they were removing debt obligations and in a way saving themselves money over the long term by reducing the amount of money they would have to pay in additional interest on such loans over time.
Look for opportunities and have a little fun…just a little
Besides paying down or paying off debt, which can be a great opportunity (especially when interest on savings is low), other opportunities for managing a windfall could be considered before thinking about spending options. Stashing a little extra in a retirement account, buying a government savings bond, putting some money in a certificate of deposit, putting some extra money away for college savings, or adding to an emergency fund may be options. However, life shouldn't be all work and no play. This is why, when we got an unexpected additional amount from our income taxes this year, we decided to have a little fun. While the amount wasn't huge -- an extra $500 -- is was unexpected nonetheless. We took $200 of the amount and set it aside for summer fun as a treat for ourselves, feeling good that we'd put the other $300 toward savings.
So while it can be important to consider responsible options when it comes to a windfall, a little fun can make the sacrifice of saving just a little easier.
More From This Contributor:
The author is not a licensed financial professional. The information provided in this article is for informational purposes only and does not constitute advice of any kind. Any action taken by the reader due to the information provided in this article is solely at the reader's discretion.
- Personal Finance - Lifestyle
- Financials Industry