Your Great-Aunt Madge dies and leaves you $20,000. You win the Okefenokee Poker Playoff and take home $2,100. Spacely Sprockets pays out $4,700 in profit sharing.
What should you do with this money?
The typical response is to spend it on something fun, something you don’t really need. Something like a jumbo-sized wide-screen high-definition television with Sensurround.
The latest Money Magazine “Ask the Expert” question offers better advice about what to do with a windfall. A reader asks:
I recently came into a $3,500 windfall from a tax refund and sale of a vehicle and am wondering whether I’d be better off investing this money in a Roth IRA account or putting it toward my $8,000 in credit card balance? I’ve already been making more than the minimum payment each month toward this debt, but by applying my windfall to the credit card account I’d pay it off even quicker. What do you think is the best move?
Walter Updegrave answers that paying down the credit card balance is likely to be the best move mathematically. But he notes that it may be better psychologically to put the money into an IRA, despite the probable lower return. He recommends the fellow invest his money for retirement.
If you put the $3,500 toward your credit card balance, maybe you’ll finish paying it off more quickly, or maybe you won’t. Maybe after paying off the credit card you’ll start funneling money into a Roth or other savings vehicle. Or maybe you won’t. Maybe a few months from now you’ll see some nifty new gadget you want or you’ll decide to reward yourself with a nice vacation or whatever and use the convenient plastic currency.
What makes this column notable, however, are three pieces of advice Updegrave offers at the end:
- Consider splitting the money between the credit card and the IRA. There’s no reason the money can’t be split among the choices.
- Regardless of the decision, be sure to pay more than the minimum required on the credit card every month.
- Once the credit card is paid off, take the money that was being used for monthly payments and begin using it to make monthly investments.
If you’re lucky enough to obtain a windfall, use the money wisely. I believe that it’s fair to set a small portion aside as mad money, though. Pass on the Jumbotron, but do something fun.
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This article is about Choices
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I consider everything outside of my regular salary a windfall, no matter how small, and apply it to savings/investment. I get a bonus at work, it’s a windfall. I get a tax refund, it’s a windfall. I get a $15 mail-in rebate for some widget I purchased, it’s a windfall.
The reason I do this is because I lump income into 2 basic categories: income that I can depend on, and income I can’t depend on. Anything I can’t depend on is a windfall and useable for future growth. I allow enough money out of my “regular” income to have “treats” so I don’t feel deprived. I must say, it’s worked rather well over the years. I think it’s helped me save a lot more than I would have otherwise.
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We have sold our business and will be getting a large amount of money. Since we have little retirement savings-what is the best way to save the most and get taxed the least?
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