For millions of Americans, they have or will soon receive a tax refund check this year and for others this is the time of the year they are receiving annual bonus payouts. These windfalls of money can be a great temptation or a great opportunity.
What are the temptations with money windfalls?
Probably the biggest temptation for anyone who receives a windfall of money is to spend it on unplanned purchases. Maybe you decide to take a second vacation, buy a new state of the art entertainment center or something else you were not planning to do. There is nothing wrong with being spontaneous as long as you have your financial matters under control.
Are there issues this type of unplanned behavior can create?
Yes, it is the multiplier effect. People will sometimes rationalize spending more because they are using funds they didn’t expect to get. They spend twice the amount they are getting and end up in a worse financial situation than they were before getting this windfall of money.
How is a cash windfall an opportunity?
Any money that is outside of our normal monthly cash flow can be very beneficial to improving our financial situation because you don’t already have it earmarked for spending. With a little discipline and planning, you could change your financial situation and have a dramatic improvement going forward especially on your net worth.
What would be smart financial moves when receiving a windfall of money?
There are three very smart moves. The first is to pay off any credit card debt or at least pay it down significantly. Another option is adding to your emergency fund, or third possible alternative is to save it for retirement or college education. All three of these moves will have a positive impact on a person’s net worth.
If someone just has to spend it, what would be a few smart choices?
If you are a homeowner, invest in your home, even a small refund or bonus can pay for painting a few rooms or updating bathroom sinks or maybe even a fence for the back yard. Another good option is to spend it on something you were already planning to purchase in the future rather than a spur of the moment purchase. At least you are using the funds for something that was a planned expense and not extending your debt.