Making the most of small windfalls

It's a big day at Get Rich Slowly HQ. Later this morning, I'll speak with my book editor for the first time. This project is about to devour large chunks of my life. Fortunately, the new Staff Writers will pick up the slack. (Actually, to be fair, I think they'll more than pull their own weight.) Here, then, is the first contribution from Adam Baker, Get Rich Slowly's first-ever Staff Writer!

Receiving a “mini-windfall” of unexpected income is an awesome feeling! However, I have a confession to make. Courtney and I are terrible at handling how we spend these pleasant surprises. More times than not, we find it insanely easy to justify squandering this unexpected money on impulse purchases, even when the rest of our budget is working well.

For the most part, we've slain the “justification” monster in our budgeting life. We've desperately attempted to eliminate the “I deserve this…” mentality. However, when it comes to “mini-windfalls”, somehow we seem to always break down.

I'm referring to the $40 in the birthday card from a relative. Or the extra $125 you made selling some stuff at the neighbors garage sale last Saturday. Even miscellaneous income from side jobs would fall into this category if not included in your normal budget.

You can see this phenomenon amplified during two specific times of the year in early February and late April. Why? Those are the peak times for income tax refunds. While preparing taxes this year,I listened to countless people tell me what they would be doing with their “unexpected” money. We aren't the only ones who are quick to justify non-budgeted impulse purchases with windfalls of this sort.

Income is Income is Income…

If we are being blunt, it shouldn't matter if the money comes in the form of a bi-weekly corporate paycheck, a quirky birthday card, or a instant tax refund chain. Once the money is in our hands or hits our bank accounts, it all spends the exact same.

As a kid, I remember watching my father mix all of the food on his plate together before eating it. In response to my stares, he would always repeat, “It all ends up in the same place, anyway.”

While you can't really argue with that logic, many would be quick to point out that they enjoy the different contrasting tastes. They enjoy the process of selecting what the next bite will be. They don't want to just combine everything together.

While some may be able to effectively treat all income equally, most of us have some sort of internal struggle. It seems like no matter what the amount of the unexpected income, I can always match it up to something I've been wanting forever. It's a nasty financial habit. One that I've honed with many years of practice.

Striving for Conscious Spending

Let me be clear. It's perfectly fine to spend on wants. It's a great idea to “blow” money from time to time. But if we aren't conscious about how we handle this process, it can spiral out of control.

Courtney and I realized that we needed to establish parameters on how to deal with this sort of income before it actually arrived. We weren't against allocating a portion of it to indulge our wants, but we did want control over the situation.

If we were going to “blow” money, I at least wanted a say in it. We no longer had interest in letting our whims have free rein over this portion of our income.

Two Strategies to Buck the “Justification” Habit

As I pointed out above, ideally we could just treat all income equally. We'd budget it all the same and allocate the “unexpected” in the same fashion as our normal paycheck. In practice, however, many of us still find ourselves compelled to splurge.

Here are two simple strategies that have helped us reestablish control:

  • Choose one specific, tangible goal to “catch” all extra income. The key is to select a specific goal ahead of time. For example, many choose to immediately throw any non-budgeted income at their debt. Once they've established what order they will pay off their debt, they simply apply all extra money as soon as it appears. This can also work for other goals, such as paying cash for your dream car or saving for a down payment on a house. My experience has been that if you pick a compelling goal, you'll be inspired to find even more ways to increase your “unexpected” income. A worthy side benefit of this tactic.
  • Allocate a pre-determined percentage to “blow” money. This system is commonly used with larger windfalls (inheritance, sales of major assets, etc…), but can be applied to the smaller ones, as well. For example, you may choose to allocate 50% (with smaller windfalls) of any non-budgeted income to be spent as “blow” money, while they other 50% is either funneled into the normal budget or put towards a specific goal (as above). This tactic also can motivate you to find more ways of generating income. After all, the more side income you bring in the higher the percentage you get to apply towards personal wants.

Keep in mind, that neither of these tactics is going to completely solve the issue. I'm not a big fan of outsourcing responsibility onto a system of some kind. However, experimenting with these two techniques has helped me maintain control over an area that is a reoccurring weakness.

Once again, it's all about consciousness. I feel empowered when I consciously choose how I treat all income that comes into our life. Even if I choose to spend it in the same way, I like knowing I'm in control.

How do you handle unexpected income in your life? Do you lump it all together or have you designed a specific system to handle it? What techniques do you use maintain control?

Photo by lepiaf.geo.

More about...Investing, Budgeting

Become A Money Boss And Join 15,000 Others

Subscribe to the GRS Insider (FREE) and we’ll give you a copy of the Money Boss Manifesto (also FREE)

Yes! Sign up and get your free gift
Become A Money Boss And Join 15,000 Others
guest
74 Comments
Oldest
Newest Most Voted
Inline Feedbacks
View all comments
Ray
Ray
11 years ago

We have all our finances on autopilot and dont do detailed budgeting every month. Since we dont much in debt, except some student loans left. We generally take the extra income and put it into our travel account, I love traveling around and seeing places so this works out great.

If we have sufficient funds in the travel account we just use it to pay off the small remaining student debt, other than that we try to enjoy the extra income when it’s available

Emily@Under$1000PerMonth
[email protected]$1000PerMonth
11 years ago

We have an upcoming “windfall” of $40 coming our way. I’ve been agonizing about how that money is going to be spent, because there are some things we need. Then my husband told me this week he would be getting a bonus in his paycheck, much more than $40. We have a savings goal, and since the $40 will satisfy what we need to buy, the larger sum can go freely to savings.

Corey@KismetPlan
11 years ago

One thing I like to do is have a “cooling off” period before spending any windfall money. It’s easy to get excited by the world of opportunities that awaits you when the money arrives. However, if you just stop for a few days and let the money sit in your bank account…you start to come to your senses a little bit. I have a strategy I like to use with my paycheck that handles employment related windfalls. I set my direct deposit at work to send any extra payments directly to my savings account. I wrote a blog article about… Read more »

Chiot's Run
Chiot's Run
11 years ago

Any windfall gets thrown into our dream cruise fund. It keeps us from spending it and this money acts as a secondary emergency fund should we ever need it.

Sometimes if it’s a large amount we use it to purchase something off of our improvement list. We have a list of items and things that we need to do to improve our home but aren’t necessary. For example, next time we get a big windfall we’ll use the money to buy a nice water filter.

Antonio
Antonio
11 years ago

In my opinion, every windfall should be saved; however, when I get a bonus, normally I try to fund my “christmas account” and my “entertainment account” equally with 10% each. The rest (80%) could go splitted to “high risk account” to purchase stocks, and the other amount to buy gold (ETF’s).

Lady J
Lady J
11 years ago

I’ve done my share of squandering windfalls! Surprisingly, I’m better at saving the $40 here-and-there ‘windfalls’ from receiving gifts, a rebate check, or selling books at the used bookstore. In my younger years, I’d been known to spend large bonuses on eating out, drinking, and clothes…. never remembering later exactly what I’d bought. Now, however, my fiancee and I are likely to put all ‘windfall’ money (such as his upcoming bonus from work) towards paying off debt or towards bills. I dream of the day when that’s all paid off and we’ll put bonus and windfall money towards savings or… Read more »

Emily D
Emily D
11 years ago

We used to use all extra money as blow money. We would use it for fun stuff. And then we decided to get out of debt. Now all extra income (except birthday money) goes towards debt. But we are almost done and soon these windfalls can go towards something a little more exciting like a vacation!

virginia @ where you hang your hat
virginia @ where you hang your hat
11 years ago

Yep, we put our “windfalls” in a travel savings account. We’re saving up for a trip to Europe. When we make money with little side jobs of our own (playing piano for me and photography for my husband), we keep half for ourselves and put half into our joint travel savings.

Foxie@CarsxGirl
11 years ago

I’ve always wanted to do better with this sort of thing, but my husband and I aren’t on the same page. He just got his $380 clothing allowance, and that’ll be put towards the ~$850 seat he’s decided to get for his car. I tend to take the “extras” like that out of the equation and deal with unexpected money completely different. If not, I’m afraid that we wouldn’t be able to live during times where no extra money comes in. Tax refunds have gone to debt and savings in the past, and this year it’ll be split between spending… Read more »

Kim
Kim
11 years ago

I’ve been guilty of this and it was a good reminder. Thanks. Welcome aboard.

P.S.– “free reign”? I think you mean “free rein”–as in a horse which has been given his head and some freedom– since “reign” is about kings and is not free. 🙂

RainyDaySaver
RainyDaySaver
11 years ago

I work FT, but I freelance on the side. Since the freelance income isn’t a given, I consider it “windfall money” and toss it right into our savings account. In addition to padding our emergency fund, it helps pay off our credit card debt and occasionally is used for something fun!

DeborahM
DeborahM
11 years ago

We’ve done what you propose, J.D., and identified a truly compelling purpose: DH likes to say that it’s our “Holy Mission” to pay off our mortgage ASAP. That included saving the largest downpayment possible, BEFORE getting into the mortgage game 5 years ago. Two years left to go. Even we are surprised at how quickly it’s going down! Still, we’re somewhat flexible. Two years ago we forked out an extravagant amount by our standards to accompany my parents to The Olde Countree, and stay in swanky hotels. Ugh. Still makes me cringe to think of the unnecessary cost. Still, parents… Read more »

SF_UK
SF_UK
11 years ago

I use the percentage system. 10-20% of the windfall (depending on the amount, the percentage is smaller if it’s a large windfall) goes into my splurge fund. This is also where any money that’s left over from my weekly budget goes, and funds stuff that I couldn’t ordinarily afford from the weekly budget. The rest goes straight into savings. For larger windfalls of more than £500 (e.g. when a consultancy cheque comes in), I try to remember to spend a small amount (up to about £10) on a treat for myself. That comes out of the splurge fund though, not… Read more »

David@DINKS Finance
11 years ago

As an avid poker player, sometimes I get these “unexpected” windfalls. One night I won a couple hundred bucks and I said “OH RIGHT!” and went to mall of america with my girlfriend to go get new clotehs. I should know better, since I had been playing regularly for about three years when that happened but I couldn’t help but feel I “deserved” it. There’s one big problem with this: “unexpected” losses. The next week I had a tough session and lost half of it. I was upset because I knew I should have planned for this to happen, and… Read more »

Rae
Rae
11 years ago

I have to admit that I still haven’t quite solved the “don’t spend it all” mentality. Although, it definitely depends on how the money comes in. A lot of times, if I take a freelance gig (which could be considered windfall since I work FT), it’s specifically so that I can buy something I’ve been wanting – and thus keeps me from getting off track on my budget/debt repayment. When I sell things like books, I have been good about putting that toward debt. The big problem is with gifts. I really need to work on not blowing that on… Read more »

Matt Jabs
Matt Jabs
11 years ago

“…if you pick a compelling goal, you’ll be inspired to find even more ways to increase your unexpected income. A worthy side benefit of this tactic.” That is a powerful mindset, and one that is very easy to overlook. It is WAY too easy for us to forget that “giving yourself a raise” and reaping the bennys of our hard work… is one of the most powerful and basic concepts of all entrepreneurs. What do I do? Simple… I put 75% of all extra windfall money toward my debt repayment and 25% toward my savings (The Balanced 75/25 Method). I… Read more »

Shane
Shane
11 years ago

I don’t really have a problem with how I utilize my windfall money. The way I look at it is this: it’s money I wouldn’t normally have, so I won’t miss it by putting it towards debt or savings. To me, finances are like a game of war, debt vs savings. That windfall money is like the reinforcement paratroopers dropping in on the front line. You can’t have financial peace as long as debt isn’t defeated, and when it is, your savings army needs to be at full strength in case another confrontation emerges. Finances are extremely fun to me.… Read more »

Ryan Stackhouse
Ryan Stackhouse
11 years ago

Great article Baker! In the past, I’ve been known to splurge on the wanted things that I imagined up when I had a windfall of money. Now, my windfall account is my IRA or my money market account. If my IRA is already full for the year ($5000 per year), I will just direct it to the money market account where it’s still liquid, but earning interest. I have paid off my Jeep and have no credit card debt, so now I’m just tackling the student loans and the mortgage. I like to keep a healthy bit for emergency and… Read more »

The Incidental Economist
The Incidental Economist
11 years ago

Economists have given some thought as to how people spend bonuses or windfalls. Milton Friedman’s “permanent income hypothesis” is that a windfall will have little impact on consumption. This is a macro way of thinking. Of course individuals will react differently. But, on the whole, this hypothesis says that one can’t expect a great deal of additional consumption from a population handed a bonus. There is only a small stimulative effect from a tax rebate, say.

For more along these lines, see http://theincidentaleconomist.com/how-not-to-spend-a-bonus/

Linear Girl
Linear Girl
11 years ago

We try to strike a balance between using windfalls sensibly and still treating them as bonus money, outside the budget. We have a list of things we really want but don’t actually need (new: iPod, motorcycle helmet, skis, carpet, furnace, etc.) and when windfalls come we generally spend on something from the list sooner than we otherwise would. This way we don’t blow it on random stuff but still get the pleasure of an unexpected purchase. If the windfall is insufficient to buy any particular item, we save it. We did not employ this strategy, however, until all non-mortgage debt… Read more »

MyLifeInBrampton
MyLifeInBrampton
11 years ago

I try to make it simple. Sometimes I get a few thousand dollars profit from trading. So:

20% Conservative Mutual Fund (Monthly Income)
20% RRSP
20% Mortgage
40% Fun money 🙂

This way motives me to make more so I can have more fun money but 60% is saved. Fun money has being used for travel, Central AC, Cars, movies…

ldk
ldk
11 years ago

I think that a distinction SHOULD be made for the source of the windfall. In the case of things like work bonuses, garage sale proceeds and tax refunds (where the source of the windfall is actually earned income)the money should be treated like any other income and distributed accordingly. In the case of gifts, however, I think the givers intent should be considered…ie, Grandma likely intends that the $40 she slipped in your card be used to treat yourself to something nice…and likewise should be used as such.

Charley Forness
Charley Forness
11 years ago

Nice article, Adam. I agree, the key is to have that financial goal that you’re saving for with the windfalls. For me, the windfalls go into my triplet’s respective 529 plans. Being just born a few months ago, I am making a mad charge to maximize the money going in there now to take advantage of compound interest. That will likely continue for another year until I start preparing for our next vehicle purchase. I did this last year to pay off my home mortgage. I think if I didn’t take this care, I would have the world’s largest book… Read more »

KC
KC
11 years ago

Looking at some of the Comments, many seem to share my view of disappointment when it’s all spent. I remember getting a windfall and took a week’s holiday to North Africa. Although it was interesting to experience a new climate and culture, when I got back I felt foolish that I had an empty wallet! This time, rather than taking an exclusively consumerist approach, which inherently must lead to that disappointing feeling when its spent, I’m playing with the idea of exploring “how can I use this money to make more money?” Admittedly this is not feasible with a $40… Read more »

Paul in cAshburn
Paul in cAshburn
11 years ago

When my checking account balance is normal (I tend to carry a balance in my checking account that will cover all expected expenses for the next month), all windfalls go into the savings account. If I’ve recently paid property taxes or some other large bill, I put windfalls into the checking account to get the balance back up. I hadn’t thought about this before, but I found it interesting that I don’t even think of spending windfalls. I consider them as income, and income goes into the bank. How money comes out of the bank is a different subject, of… Read more »

mythago
mythago
11 years ago

What a great post.

We do the percentage method – that way we get the feeling of “woohoo, free to party!” without making a serious impact on saving money for important things. I’ve learned over the years that a smaller splurge can be as good as a huge one (and sometimes better, because you don’t get spending hangover).

Four Pillars
Four Pillars
11 years ago

I agree that technically all windfalls should be treated as normal income…but in reality – hard to do. 🙂

One point is that sometimes people abuse the “windfall” idea by intentionally “forgetting” about upcoming refunds or money they already have.

Just because you forgot about your tax refund or some money in the bank doesn’t make it “found money”.

Moneymonk
Moneymonk
11 years ago

“I feel empowered when I consciously choose how I treat all income that comes into our life”

Well said

Suzanne
Suzanne
11 years ago

I thoroughly enjoyed this post, from the writing to the message.

I also was going to emphasis the same point as Moneymonk (#28)…so I’ll just say ditto!

Whether one chooses to blow the money or save, etc. is less important. As long as you are consciously making a choice about the matter, you are ahead. How far ahead is a personal decision and not ‘wrong’ unless it doesn’t work for you (e.g. ALWAYS choosing to buy more stuff when you haven’t paid off the credit card debt for the past stuff, etc).

EscapeVelocity
EscapeVelocity
11 years ago

The larger “windfalls” (checks from my parents, as an “advance” on the inheritance) get used for my Roth IRA and to make up for the money deducted from my paycheck for the retirement plan at work, so I can afford to put more into my 401(k) (I went to graduate school, so I’m playing catchup on the retirement savings). Smaller stuff gets divided among the emergency fund, travel fund, and major purchases fund, depending on their current levels. Cash does tend to just get spent.

Tyler Karaszewski
Tyler Karaszewski
11 years ago

J.D., now that you’ve got people on staff, you should change the “authorship” line that appears under the title of each post to reflect that. The top of this post says:

Making the Most of Small Windfalls Print
Tuesday, 1st September 2009 (by J.D.)
This article is about Budgeting, Choices

Which really doesn’t properly credit Adam for his work. It’d also make for a confusing article if it wasn’t for your disclaimer paragraph at the top (who’s this Courtney person J.D.’s writing about?).

Steve
Steve
11 years ago

Most of these “windfalls” (tax refunds, cash back checks, etc) my wife and I just put in our checking account with the rest of our money. We don’t have any debt and save a decent enough percentage of our incomes automatically (via maxing both our 401(k)s and whatnot) that if we spent every dollar in our checking account, we would be fine. But usually we build up a surplus in our checking account (both from windfalls and just regular income) and transfer it to savings every now and then. There are two exceptions to “every dollar is fungible”: 1) Gifts… Read more »

Barb1954
Barb1954
11 years ago

I agree with post #22, that the source of the money makes all the difference. Bonuses and any tax refund are earned income. (The latter is such a stupid idea. Why give the government an interest-free loan? We adjust our withholdings so we get our money all year.) Birthday, holiday, or other gifts of cash, however, should be spent on something you like, as the gift giver intended, rather than on a regular expense that should be in your budget. Adding it to a vacation fund is a great idea. Then as you’re eating dinner while on a trip, you… Read more »

threeoutside
threeoutside
11 years ago

I’m very lucky in that Ihave no debt, and my house will be paid off in December 2010. However, I’m a widow as of 2006, and I’ll retire in 2016, and it will be a very frugal retirement. My late husband liked to collect a lot of different things, all fine things, not junk, but they are of no use to me. A complete professional darkroom and all its appurtenances, for example, and of course several cameras, lots of lenses, etc etc. Then there is the art, the Southwestern Indian pottery, the Near Eastern antique copper, a bookshelf full of… Read more »

Tim
Tim
11 years ago

…or, just put it into your savings account and stop thinking about it so much.

I can’t believe your first ever staff writer took 17 paragraphs of jibber jabber (albeit some were very short) to say this.

Dan
Dan
11 years ago

To me there is a difference between small windfalls like gifts from relatives and the tax refund, the tax refund I treat as normal income and sock it into the budget accordingly.

Gifts of 20, 40, etc. dollars though I tend to use in whatever way that will make me most happy, since it is a gift and I didn’t expect it in my life, I don’t feel bad about splurging with this generosity from others.

Gholmes
Gholmes
11 years ago

I agree with IDK’s comment 22. A distinction should be made regarding windfalls and birthday money. Along that line of thought, if you are counting a tax refund as a windfall then that is some poor planning. A tax refund is a person’s free loan to the government.

My decision of get rich slowly is that I can enjoy life along the way as I make better financial/life choices.

Justin
Justin
11 years ago

I made an ING account for this money, and label it “fun money from windfalls”, for traveling and such. If I were to make a purchase with it, I must move money into my checking account, so I force myself to make the decision whether or not to spend it. I think at the end of the year, I’ll take 50% out and add it to my emergency fund, or put it into my mortgage. Any other suggestions? Amazon wishlists can also prevent me from spending money on things I don’t need. There’s a meat cleaver that’s been in there… Read more »

Cara
Cara
11 years ago

I usually get a large bonus each year at work, so I allocate it like this: 25% to investments, 25% to mortgage paydown or emergency fund, 25% to my car/home improvement/vacation savings, and 25% to spend freely.

Kevin@OutOfYourRut
11 years ago

It seems the “Choose one specific, tangible goal to “catch” all extra income” method would work best.

Having a pre-determined destination for the windfall is the best way to avoid impulse taking control once the money is in hand. The human factor always needs to be addressed.

I have a theory that there’s at least a hidden spendthrift in all of us!

Sudip
Sudip
11 years ago

Great article Adam! I am going to really enjoy reading your thoughts and ideas on personal finance, in addition to JD’s.

Kaitlyn
Kaitlyn
11 years ago

I am required to travel with my job, which always yields a hefty reimbursement check for my mileage at the end of each week. My fiance and I used to spend this extra money on things that we wanted/needed like a new vacuum or decorative stuff for the apartment. Now that we are a little more established, we’re putting all of my reimbursement checks into our savings. We’re building up our emergency fund as well as a little extra cushion for our wedding and future education expenses. It feels great to regularly contribute to our savings account, and as long… Read more »

bethh
bethh
11 years ago

ha! my car repair yesterday only cost ten dollars, when I was bracing to spend around $500 and I’m struggling not to treat that unspent money as a windfall. This was very timely. I may still purchase the item I’ve been pondering for a while, but will try not to consider it a gift from my car maintenance fund 🙂 Also, I did have a more traditional windfall this spring. I wrote down everything I could think of that I might like to buy with it, then added up the totals – it was three times the amount of the… Read more »

Barb1954
Barb1954
11 years ago

Kaitlyn at #42, if you’re driving your own car for work and getting hefty mileage checks in return, you may want to set aside that mileage money for when you need a new car, which may come faster than normal. That’s what we did when my husband first became a salesman, drove his own car, and got mileage reimbursement. When he needed a new car, we had the money to buy a two-year-old Honda Accord for $14,000 cash. A year or so later, however, he switched companies and was given a company car as part of his compensation package. We… Read more »

EK
EK
11 years ago

I use the second suggested method of allocating some splurge money from unexpected windfalls, particularly on larger ones (like a bonus at work). At least 50% goes straight into savings, while a maximum of 50% is blown on something fun. If the fun things I want the most doesn’t take up the full 50%, into savings it goes.

I think it’s almost double the fun that way – not only do I get to blow some cash on something extraordinary, but I get the thrill of seeing a sudden boost to my savings, too!

RB @ Financial Samurai
RB @ Financial Samurai
11 years ago

I remember when i was in my early 20’s, and it was the year 1999. I spent $5,000 bucks three stocks, one was defunct VCSY, the other two were AMZN, and Yahoo. My position grew to $180,000 in 6 months! That was the biggest windfall I had ever received since then b/c I sold at around $150-160K. The proceeds were then flushed into more internet stocks, which then lost 10%, and I got out. The money was staring me in the face everyday, and as a result I splurged on fine restaurants, cars, and motorbikes. I literally spent $35,000 on… Read more »

Sam
Sam
11 years ago

For the tax return, which is often a big chunk of cash, we take 20% (10% for each of as fun money) the rest of it generally goes into our IRAs for that year and/or emergency savings if we already funded our IRAs.

We don’t really get any other unexpected windfalls during the year, but any extra money generally goes to savings.

Little House
Little House
11 years ago

I completely understand Adam’s point of view on windfalls. My husband and I struggle with small windfalls, $50 birthday money, $80 ebay sales, etc. It’s difficult for us to take the smaller amounts and stock them away in our savings account. It all kind of ends up being spent on dinners, or something fun.

I’m going to make a conscious effort to put the small windfalls in my savings.

thanks for the post-
Little House

David/Yourfinances101
David/Yourfinances101
11 years ago

Staying focus with respect to these “windfalls” was a key to me getting out of my financial mess as quickly as I did.

You have to keep your “eyes on the prize” and shoot this income straight to your debt.

Reward yourself when you reach a milestone that you set for yourself–when these surprises arrive, use them to knock down your debt…

sarah
sarah
11 years ago

I’m with those who think windfalls should be classified into categories. Birthday/gift money and additional income or other truly unexpected windfall money. Birthday/special event gift money is used for just what the givers intended – us to purchase something that brings enjoyment (usually off of our running “want list” where we keep track of things – avoids impulse buys). Additional income or unexpected windfall money goes toward specific goals outside of our normal budget. I am a little confused by those saying windfalls should go in the “normal budget” – with a zero based budget, there’s nowhere for it to… Read more »

shares