While playing the Prosperity Game, I got to thinking about my personal rule-of-thumb for handling real-life windfalls.
This has definitely changed over time. When I was younger, I would simply split the money in halves. 50% to pay down debt (which always needed paying down), and 50% for "something nice." That was nice, but had the effect of making the windfall disappear very rapidly, with little to show for it.
Small Windfalls
My new technique for small windfalls, especially ones happening toward the end of the month, is to simply add them to my monthly budget. Likely this will make me have a "rollover" to next month, where I’ll allocate the money for something the family needs. This can be fun as well, since we may get to buy something we’d expected to have to wait longer to afford. Of course, much of the time the money simply gets allocated to pay down our rapidly shrinking credit card debt.
Large Windfalls
I don’t really have much history with larger windfalls. The biggest one ever was the sale of our last house, which netted us about $50,000 profit. That all was rapidly sunk into our new house, and into completing the adoption of Clio. We didn’t really have a plan, and the money evaporated. We can do better by thinking through a better rule for handling such influxes.
The last big windfall we had was about $10,000 from tax refunds this spring. We allocated that money in approximate thirds. 1/3 went to the business startup costs, 1/3 went to pay down debt, and 1/3 went into our "freedom account" to be spent on home improvement and education. (I was going to link an article I wrote about freedom accounts, but I see that I never wrote it. Blog post soon on that topic!)
I think that three-way split was pretty good, but I want to try a small tweak for next time. I think my rule of thumb next time will be:
- First, take out taxes and set aside in savings account. The percentages are for what remains.
- 50% debt, if any
- 25% house repair and education accounts
- 15% Retirement
- 10% Vacation & mad-money
I’ve been thinking for some time now that it feels like a windfall on the order of another $50,000 is going to enter my life in the next few months, so having a general plan in place feels like a very wise idea. Crossing my fingers. I love windfalls.
Technorati Tags: windfall, budgeting
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[...] It is a more interesting game than I even realized at first. As I was driving to work this morning, I was thinking about how I "should" be spending the dream money. I think that’s the trap, or anyway a lesson this game is supposed to teach. I’m not supposed to optimize the money stream. If that were the case, I should do my normal rules for windfalls. [...]