Revisiting Windfalls

What exactly is a windfall? Simply put, it’s when we come into a substantial sum of money, oftentimes unexpectedly. Sometimes you can see a windfall coming or it may be a complete surprise! Seems like some people are always coming into windfalls, while for the rest of us it may only happen once or twice in a lifetime. Having a plan for windfalls if / when they come is an important part of personal financial management.

Investing early and often is a financial truth for the worker to build wealth. Using windfalls to pay off bad debt or invest is a great way to apply this financial truth. Bottom line, windfalls are for investing, not for blowing! My wife and I are fortunate to have recently came into a nice windfall after the sale of our former home. We lived in the home for eight years and upon closing, netted a respectable gain. As an added bonus, since it was our primary residence, the tax man won’t come knocking!

Selling our home and the subsequent windfall wasn’t a surprise. As I shared last week, due to the nature of the sale, the closing drug on for almost five months! We had plenty of time to consider how to properly employ the windfall. I’ve blogged and wrote books on this very topic and consider myself a somewhat seasoned investor. Then why am I having such a hard time figuring out what to do with this one?

I think it all comes down to timing. I certainly have a different perspective on windfalls in my current stage of life than I did just ten years ago.  Back then it would have been a no brainer! I would have already had a great real estate investment lined up to roll the proceeds back into.

But things change. My family has changed, and the economy has changed.  We will actually be spending about 25% of the gain on improvements to our new home. I rationalize these as needs rather than wants as the improvements will help increase the value and marketability of our current home. As part of the improvement process, we have been diligent about seeking out bids from several contractors. Bottom line, we feel pretty good about spending the funds on what we feel are investments in our current home.

What about the other 75% of our net gain? That leaves a lot to invest or pay off debt. We are funding our 2024 and even 2025 Traditional IRA contributions and also keeping a portion to build up our emergency reserve which was depleted over the past several months as we moved into our new home. With one in college and another entering soon, we could definitely stand to plus up the 529s.

I think it’s the bad debt thing I’m having a problem with. Thankfully, we don’t have any truly bad debt. Just car loans at reasonable rates and a whole slew of mortgages on our rental investments. As I am crunching the numbers, I’m not so sure it makes sense to pay off the car loans. Our ROI might pay better elsewhere.

Similarly, although paying off one of our rental property mortgages would net about a 10% annual ROI on the amount, I’m not so sure I want to lock that much capital up in a building.

I guess what’s gnawing at me there’s still a twinge of ambitious real estate investor trapped inside. I found myself looking at investment real estate this past week. I still have a slight urge to take this windfall, drop it into another rental property and multiply it two or three-fold!

It all comes down to time. Do I want to invest in real estate, what I know to be a profitable but consuming time suck or do I want to put the money in something safe and low maintenance like paying off a mortgage or one of these 5% CDs that’s floating around now.

Don’t get me wrong, this is a great problem to have, and I am so very thankful to have it! The bottom line is, even in our 50s, we are looking at ways to make our windfall work for us instead of blowing it on material wants. My guess is, we’ll be this way for the rest of our lives.

And that is the moral of the story. In my humble opinion, we must fight the temptation to blow a windfall. Use windfalls to invest or pay off bad debt; it’s a necessity for the average American to build wealth.  

Interested in rental property investing? Look for Collect Rent, Don’t Pay It: A Beginner’s Guide to Rental Property Investing on Amazon to learn how our family turned rental property investing into a successful side hustle!

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