Have a Plan to Maximize Your Next Financial Windfall
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In a post earlier this month, I talked about how I’m receiving some stock shares from my company’s ESPP. There were a few options I was thinking through on how to best utilize the money. This is an important exercise to go through before you experience a financial windfall.
There’s a good chance that at some point you’ll receive a financial windfall of some type. Whether it be a new job with a higher salary, a tax refund, getting a raise at your current job, bonuses, inheritance, gifts, or various other methods. While you may not know when it will occur, it’s best to be prepared with a plan in place before it does. Without determining your goals and values for what you’re working towards financially, it can be very tempting to blow it all right away.
Tax Refund Time of Year
This time of year makes this topic especially relevant, as many people will be receiving a tax refund. While I prefer to not receive a tax refund and instead opt for higher paychecks throughout the year, receiving a tax refund can act as a way of forced savings if utilized properly. Around 80% of people receive a tax refund and the average across the United States is $2,895. This money can make a big difference in people’s lives by paying off debt, building up and emergency fund, or allocating it towards retirement savings.
The problem is that many people receive this huge check in the mail and then are tempted to blow all of it on a vacation, upgrading the furniture, or any other number of spending decisions. Spending some of it is fine, but you want to use this opportunity to make progress instead of being right back where you started.
To avoid the temptation to splurge too much, take some time to craft your plan on how to allocate the funds. What is your biggest financial goal? Where do you hope to be next year? Thinking through these questions will help determine the best use for the windfall.
Evaluating Our Situation
For example, in my situation I identified a few values we’re working towards:
- Debt freedom – paying off debt will help us reach this goal more quickly
- Flexibility – investing in our Roth IRA will help the money grow and provide us more options in the future
- Diversify – by selling the shares and investing in index funds we diversify our investments and take on less risk
We decided to go with a hybrid approach, putting some of the money towards paying down our car loan and some of the money towards our Roth IRA. This decision ensured we were maximizing this windfall by increasing our net worth and flexibility. We broke it down into percentages, 50% of the money towards debt and 50% towards investing. If you have more goals or are more focused on one than the other, you can adjust the percentages accordingly.
It’s a good idea to take some time as a “cooling off” period right after you receive the windfall. This insures your plan won’t change and helps you think more clearly without letting emotions get involved. Ultimately, there’s no ONE right answer for how to best utilize the extra money. Only you can answer this question for yourself, but you want to use this windfall to bring yourself closer to your goals and enhance your future.
Related Reading: Is Getting a Tax Refund a Good Thing?
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