It’s been just over a year since we began this lifestyle experiment of semi-retirement and full-time travel. When we quit our jobs at the end of January 2016, I had about one year’s worth of spending money held in cash. The rest of my savings remained invested in stocks and bonds.
My rough financial plan was to spend down most of our cash first (offset by any side hustle and rental income), then begin drawing from investments. We’d use the 4% rule as a guide for long-term sustainability, but we wouldn’t treat it like gospel. We plan to earn more income in the future in some form.
By my estimates, we’d need to start selling shares sometime around January 2017. That turned out to be just about right. As of last month, we were getting low on cash, and I was starting to plan our first stock sale.
Then this happened:
Well, that changes things a bit.
Here’s the background: through a variety of circumstances involving partnership tax laws and miscalculations by my former employer’s finance department, I was dramatically underpaid for the entirety of 2015 and the one month I worked in 2016. I’ve spent much of the last year e-mailing back and forth with the company about reconciling this issue. With no bargaining power (I already quit, after all) and close to a year having passed, I had all but given up on ever seeing the money. Then, unexpectedly, they decided to take action.
Many Americans will be getting unexpected windfalls in the form of federal tax refunds over these next few months. This windfall of mine was particularly huge, but I’d pose the same question in both cases:
What should we do to celebrate?!
Bottle service at the club?!
Weekend at a five-star hotel?!
Upgrade our minivan’s engine to a twin-turbo V8?!
Our real answer:
Absolutely nothing. We don’t make spending decisions based on fluctuations in income.
It’s one of the most common and most crippling money habits: spending more money just because there’s more money to spend. If you ever want to build wealth, you must separate the two. If you can’t break the habit, there will never be money left to save.
I’ve often heard the argument that you shouldn’t go blow your tax refund on some purchase because the refund is really just your income from the prior year. It’s been your money all along, the argument goes – the IRS just withheld more than you actually owed. That’s fine. I agree with the premise. But who cares whose money it was before? It’s yours now, and that’s all that matters. An unexpected bonus, inheritance, or prize shouldn’t be any different.
Using a windfall to justify a purchase you wouldn’t have made otherwise is just playing mental shell games with your money.
If your financial windfall came along with something actually worth celebrating (maybe a promotion or having accepted a new job), sure, celebrate that event – but don’t waste the income on something that didn’t make financial sense before. When I had a positive performance review and received an end-of-year bonus a few years back, Daniel and I spent about 1% of it on dinner out. The rest went straight into savings.
Our updated cash flow plan
I did end up spending $10,000 of my big deposit the very next day. With a few clicks of the mouse, I bought myself a 1040-ES receipt from the IRS, which should cover the taxes I’ll owe on this income.
If we were still working or had a bunch of cash sitting around, the rest would’ve gone straight into the stock market. Even at today’s high valuations, I’m still a believer that stocks aren’t risky over the long haul. Because we’re currently in spending mode, though, we’ll keep the rest in a checking account, which should keep us from touching any investments until at least mid-year. I still don’t know what it will feel like to start selling those precious shares, but we’ll get to wait at least a few more months before finding out!
Have you ever had a big financial windfall? Did you treat yo’self, or were you boring like us? We’d love to hear your stories in the comments.