We all dream of winning the big bucks in the lottery or at the casino. There can be many reasons for receiving a money windfall. You may receive a significant bonus or pay increase, or an even larger windfall that fattens your bank account. Have you thought about what you would do with an extra $10,000, or $100,000, or more? How you spend this extra money can have a big impact on your future financial success. Keep reading to learn about some strategies on how to spend a money windfall wisely.
Create a budget if you don’t already have one
Receiving a money windfall can be life-changing. This is when you should adjust your budget, or create a personal budget if you haven’t already done so.
Many people spend the extra cash on non-essential items. It becomes even more important to track your spending and adjust your budgeting strategy when you receive a windfall.
The last thing you need is to fall into the common trap of wondering where your money goes each month. The saying, “If you fail to plan, you plan to fail” applies more than ever when you receive a large windfall.
What to do with a small to medium windfall
Small to medium windfalls may come from a bonus, pay increase, tax return, or a modest inheritance.
Some employers will reward good employees with a bonus or pay increase when business is going well. As mentioned above, a bonus can tempt people to spend it on items they don’t need. They feel that they should reward themselves for receiving a bonus and spend it all on a whim. Or match their pay increase with higher living expenses.
The initial high after buying something can turn to regret when they realize they could have saved the money or invested it in something that will increase in value over time instead.
A more sensible option when receiving a bonus or pay increase is to pay yourself first by splitting the extra money into your various accounts. For example, transfer 50% into your spending account as a ‘reward’ for the bonus or pay increase, 30% for investing, and 20% into long-term savings. The split may be different depending on whether it is a one-off bonus or a regular paycheck, and what your financial goals are.
Other strategies might include using the windfall to pay off debt, adding to an emergency fund if it is less than your planned amount, or purchasing investments such as shares.
Dealing with significant money windfalls
Many other scenarios result in a sudden, usually one-off, increase in money in your hand. These windfalls can be due to pure luck such as winning a large cash prize in a lottery or winning at the races or the casino. It could also be from an inheritance from a wealthy family member.
It is common to hear stories about the person who won millions, only to have it spent within a year or two. This usually happens because they don’t have a plan to manage their windfall.
The same principles of financial management apply here as they do for smaller windfalls. You would be much better off in the long term to split the extra money into your different accounts that align with your financial goals. This is an excellent way to improve your financial position and reach your goals sooner.
Alternatively, you could buy an investment property or dollar cost average into the share market. Why dollar cost average? Because on average, the share market will decline once every four or five years. Splitting your money windfall into smaller portions and buying shares every month to six months will reduce your chances of losing a lump sum due to a share market decline. Dollar cost averaging has been proven to be an effective low-stress strategy for growing wealth in the share market over the long term.
You could even start a business that you’ve dreamed of. Or buy an existing business if you have such aspirations and are given the opportunity.
If you are unsure of how to spend a large money windfall, seek advice from a reputable and qualified financial adviser. Make sure you do your research when choosing an advisor to avoid risking your newly acquired wealth! Leaving the decision to spend a money windfall too long can make it easier to spend it on unnecessary items.
More resources on how to spend a money windfall
The following books provide more detailed information on the topics covered in this article. Feel free to browse through this list and support the site by making a purchase at one of our affiliate partners. Please read our affiliate links disclosure for more information. Note: The links below will open in a new browser tab or window.
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- Windfall Wisdom: Sudden Wealth, Forever Wealth from specific investment advice and psychological strategies by Dr. Jim Kay Link*
- Sudden Money: Managing a Financial Windfall by Susan Bradley Link*
- The Windfall Club: What to Do When Life Deals You a Good Hand by Janne Ashton Link*
(*) This site contains affiliate links to products. We may receive a commission for purchases made through these links at no extra cost to you. Please read our affiliate links disclosure for more information.
