What to Do With a Financial Windfall?

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:

One of the better e-mails I've received this year

One of the better e-mails I’ve received this year

Well, that changes things a bit.

What to Do With a Financial Windfall? - The Resume Gap

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.

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26 Comments

  1. Since I worked part-time, my dad taught me to put my tax return in my Roth. We might deviate this year to keep more cash liquid for Baby, but I say boring all the way!

    • That’s a great lesson! I didn’t figure out the retirement account thing until far too late, just a couple years before we quit!

  2. I saw about $20k of income in December, which was about 25% of my annual income thanks to my bonus, a raise, and moving allowances. I put 99.9% of it into savings and will use it on my down payment for my first rental property this spring. I really know how to go crazy!

    • Wooooohoo, you and me both! That’s great that you’re putting it toward income generating assets. Much more fun in the long term. ☺

  3. That is awesome the company came through!!! Yeah for getting paid. We tend to keep a lot of cash on hand, so the windfall would have to feel rather hefty to move the needle. But knowing myself, I would instantly start looking at property (I’ve tried to kick the habit, but I still look a few times a week.) There is about 0% chance of us ever getting a sizable inheritance, but just in case I find a winning lotto ticket on the street here is how it would play out. $50k-$100k I would buy another rental. $100k-$250k we would buy some land and build a family home with guest/rental house, and then rent our current one. $250k+ the rest would go into stock/ college funds. =)

    • It sure is! I tried to be polite but persistent, though I think it helped a lot that several other employees were affected by the same issue, including a couple execs. With your DIY skills, I’d be eyeing the rental market as well!

  4. Nice! I’m glad that finally worked out for you – it sounds a bit stressful. I’m getting some deferred compensation from my former employer shortly as well. It will just go into my savings account to cover expenses this year. My cash flow goal is to get through the year without selling any shares or bonds or spending any of my home equity.

    • Yes, it definitely wasn’t the best situation for a while there. I don’t think we will generate enough income to not tap investments eventually, but that could definitely be a stretch goal for us this year. I’d love to let those shares ride as long as possible.

  5. My bonus in 2016 was about 2x what I was projecting so I lived it up by paying off my last lingering student loan, maxed out my Roth IRA, and the rest went into my brokerage account. Basically the same as poppin’ bottles.

  6. Nice one! Good that you kept talking to the company.

    I got a similar windfall in January and decided to invest and keran at the same time. I use the money now to learn more on option trading.worst case, I end up with dgi stock…

    • Great that you’re using it as a learning opportunity. Like you said, as long as the downside risk is mitigated, it’s nothing crazy.

  7. I’d use it the same way you do… to supplement any drop in rental income, long term travel, etc…

    Nicely done.

    • If there’s one thing we’re not suffering from right now, it’s work-related presenteeism! Thanks for taking the time to comment.

  8. Wow, now that is a really nice surprise! Glad you got that all settled, what a mess.

    I’ve never got that kind of money, but like you and others have said don’t blow it. Back when I had credit card bills and loans, that is where my tax money went. Once that was gone it went straight to savings, ROTH and the F U Money 😉

    Even though my salary has increased and I receive a bonus, my life style in general is still that of someone who makes minimum wage (same house and car). If I want to retire early then I got to pay myself first and save.

    You could spend a little to bling and pimp out your mini van … ha ha!! 🙂

    Take care,

    Tina

    • That’s really admirable that you’ve kept your COL at minimum wage levels even with increases in pay and bonuses. Much easier said than done with so many temptations to spend (like those fancy chrome “spinner” rims for the van!) Thanks for taking the time to comment!

  9. HAha, The Mask gift was funny!

    Nice job with the windfall! Gotta love those.

    I got a windfall coming up too, which I’m super excited about. I invested as an early investor in Bulldog Gin when it was valued around $8M, 10 years ago, and it was bought by Campari for $70M, with performance incentives that would value it at $90 million in a couple years!

    I totally wrote this investment off to ZERO about five years ago.

    Going to VEGAS baby and betting it all on black!

    Sam

  10. Oh yay! Unexpected written off money falling into your lap? Awesome pants.

    I’ve never received a windfall, unless we’re counting annual bonuses as windfalls. If we are, then we used a part of ours this January to max out one 401k and get a pair of matching colour-coordinated his and hers Backdoor Roths. All but $500 of the rest went into our taxable brokerage account. $500 went into Mr. BITA’s liquor budget, and that will probably last him till sometime in April.

    • Totally! Not something that happens around here every day, that’s for sure. $500 of fun money isn’t an insane splurge when you’re maxing all those accounts. Colour-coordinated Roths are a stylish choice!

  11. Great news! We just found out over the weekend that our tax return will be double what we expected (I know, we should be better about using deductions, etc. through the year). While excited about this “windfall,” there is really no question about what to do with it. We’re using it to buy a new-to-us vehicle for transporting our soon-to-be family of seven and the rest is for paying off debt. Of course, we did joke about how we would have spent the money just a few years ago . . . the sad part is that many people still think about spending sprees instead of investing at least some of their windfalls for the future.

    • Oh wow, that’s excellent! Yeah, I have to laugh when I see things like advertisements specifically going for the tax refund spending sprees. I can understand why someone living in poverty might see a tax refund as a spending opportunity — that money might mean getting a decent bed or a more reliable form or transportation or something their kids need for school. But for the majority of us who already live with relative abundance, there are much more productive long-term uses!

  12. I basically had the same strategy of not doing anything when I sold my condo and suddenly had a six figure wire transfer in my bank account. The majority of it just got invested right into my equity portfolio. I think I also did five of those NetSpend savings accounts @ 5% interest…sadly no longer available.

    it’s only grown since then, but I consider that to be more luck than anything else.

    “Using a windfall to justify a purchase you wouldn’t have made otherwise is just playing mental shell games with your money.” <— I really like this mindset. I saved up a separate cash account to fund my traveling, and in reality, I'd say that when that number is cut in half-ish, that's probably when I feel like I really should divert my attentions to re-establishing myself somewhere with the uncertainty of how long it takes to get a job. (But I also expect to feel burned out from travel before I go below some arbitrary number I've decided for myself in my cash accounts.) We'll see! Three more nights in CA…

    • That’s a very sound approach with your condo sale proceeds. I’m curious to hear how you enjoy the vagabond life. It’s finally here!

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