How to Spend an Unexpected Windfall

It's a wonderful feeling to suddenly have extra money, whether it's from winning a raffle or getting a surprise bonus at work. Whether your windfall is $50 or $5,000, you can use it to make improvements to your financial situation without taking all the fun out of it. Your future self will thank you for thinking before allocating your proceeds. Here is some advice should you find yourself with unexpected extra cash.

With small windfalls, don't do anything for 24 hours. If you find yourself with an extra $50, it can be sorely tempting to hit up your favorite store right away. Unfortunately, impulse purchases rarely make you happy for long. Sometimes you'll buy something you really don't want that much because you feel obligated to instantly "enjoy" your windfall. If there is an object that's affordable that you're still thinking about after 24 hours (like a replacement for your broken coffee maker), chances are it's something you really want, and the purchase will make you happier long term.

Be smart with a $500 windfall. Sure, you want to keep a little cash to have fun with, or to treat yourself to something you've had your eye on. However, using most of your $500 to shore up your finances is smart. Consider allocating 90% of the money toward things like:

• Your emergency fund
• Credit card debts
• Mortgage principle
• Other loan principle
• Charitable organizations
• Your children's education funds

Put serious thought into how you use a $5,000 windfall. If you have $4,000 charged to a high-interest credit card, then paying that balance off is a no-brainer, and you'll still have $1,000 left over. Paying off high-interest credit and putting any extra toward your emergency fund is the best thing you can do with a windfall or bonus of this size. If your credit cards are paid off and your emergency fund is healthy, you could put the money aside toward a larger goal, like the down payment on a house.

There are some ways to deal with unexpected cash that are almost always positive long-term, such as:

• Putting extra money into your 401(K) or IRA for retirement
• Sending a donation to your favorite charity
• Making home repairs that are needed, but not critical. You could save yourself a big repair bill by taking care of small problems before they get worse.

A good rule of thumb with unexpected bonuses and windfalls is known as the "80/20" rule. Save 80% of your windfall, and spend 20%. This allows you to have fun while helping out your long-term financial picture.

One thing you should never do, however, is to create a budget assuming you'll get a certain size Christmas bonus or cash gifts from relatives. Budget assuming you won't have any windfalls and you'll be able to enjoy them that much more when they do occur. Having a plan on the back burner for windfalls of various sizes will help you make the most of any unexpected cash that comes your way.

Sources:

http://www.mortgageloan.com/how-to-spend-your-christmas-bonus-1425
http://www.bargaineering.com/articles/windfall.html
http://www.bankrate.com/finance/personal-finance/8-smart-ways-to-approach-a-hefty-windfall-9.aspx
http://www.kiplinger.com/columns/starting/archive/5-ways-to-spend-a-financial-windfall.html