Windfalls

As I prepare for 2021 tax season and receive notices from the IRS about the child tax credit paid out last year, I am trying to remember what we used the money for. Most likely we spent it on bills, groceries or perhaps a car payment.                                       

The advance on the child tax credit as well as the stimulus payments over the past two years were well intentioned and much needed by many Americans. However, there were probably a lot of folks like me who, rather than put some thought in how to effectively use the “windfall”, just spent it on daily needs or worse, a fleeting want.

Most people will encounter a number of windfalls over a lifetime. What exactly is a windfall? It’s when we come into an unexpected, substantial sum of money. “Substantial” is of course, relative. A windfall of $1000 at the right time could certainly be life changing.

Rather than use windfalls to pay daily bills or blow on a want, I’d submit there is a better way. If possible, paying off bad debt or investing is the best way to use a windfall.  “If possible”, are the key words here. Sometimes it just may not be possible to use a windfall for anything other than immediate needs. 

What are some examples of bad debt? High interest loans or credit cards of course. Then what is acceptable debt? Those car, home or education loans that are well below 5% interest. A windfall should first and foremost be considered to pay off that credit card balance compounding at an outrageous 21% or more interest.

Then take a look at acceptable debt. It doesn’t always make sense to use a windfall to pay off a 2.9% loan when you can earn 5% or more growth if the money is invested properly. The bottom line is making every dollar work as hard as it can.

Like most things, it’s a math problem. Always pay off bad debt but do the math before paying down principal on that low interest car, home or student loan. A windfall in an investment account growing at even a modest 5% per year will nearly triple in value in 20 years.  

Windfall profits appear in our lives from various sources. The lottery usually isn’t one of them! As we’ve seen over the past two years, the government is often the benefactor.  Back in the mid-2000s, the government had some really great first-time homebuyer tax credits.

We bought our first home, a duplex, in 2008 and received an $8,500 tax credit! We placed the windfall in an investment account and watched it grow for about two years. After our $8500 windfall had grown, it made up about a third of the down payment on another duplex!  

Unfortunately, many of us may experience a windfall due to inheritance received upon the death of a loved one. Personally, I don’t think one should consider inheritance as part of their personal financial planning. That being said, death and taxes are the only two guarantees in life.

When an inheritance happens, try to take emotion out of the equation when considering what to do next. Fight the urge to spend on an extravagant vacation or buying a new car because, “that’s what my loved one would have wanted me to do”.

Consider paying off the bad debt first and invest any funds that remain or pay for pressing needs rather than a fleeting want. I’ve witnessed my family make lemonade out of lemons a couple of times after the passing of a loved one. I think most of our loved ones would be proud to see their legacy put to good use.

Windfalls will happen in our life. The circumstances leading up to the windfall may not always be pleasant. Economic stimulus payments during a global pandemic or the passing of a loved one are just two such examples.

Yet, coming into an unexpected sum of money is, in the long run, a good thing. Key to taking advantage of these touchpoints in our life is keeping our finances in order. By having a plan for windfalls, we can make a brief opportunity in our life, enduring! 

The commentary provided in this blog and in my books are for informational purposes only and not intended to be a source of financial or investing advice.

Want to read more on personal finance tips that have helped my family? Check out my book, Millionaire on a Worker’s Budget: Five Financial Truths to Build Wealth on sale now at Amazon!

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