How To Handle A Windfall
How To Handle A Windfall
By J.D. Roth| Updated: 11 September 2019
When my father died in 1995, he left behind a small life insurance policy that awarded each family member $5,000. It wasn't much, but it was the best he could do based on the fact that he had cancer. He hadn't been much of a planner, and hadn't been good with money, so that $5,000 per person was actually a significant amount.
At the time, I was deep in debt. I had over $20,000 in credit card balances, and was gradually adding more all of the time. If I'd been smart, I would have taken the proceeds from my father's life insurance and used them to immediately repay $5,000 in debt. But I wasn't smart. I used $1,000 to pay off debt (and patted myself on the back for it), but spent the rest on a new computer, software, and accessories. It didn't take long to realize that this was a dumb decision.
You see, when you receive a windfall, whether it's a tax refund, an inheritance, a gift, or from any other source, it's like you've been given a second chance. Although you may have made money mistakes in the past, you now have a chance to fix those mistakes (or some of them, anyhow) and start down the path of smart money management.
It can be tempting (as I well know) to spend your windfall on toys, trips, and other things that you “deserve,” but doing so will leave you in the same place you were before you received the windfall. And if that place was chained to debt, you'll be just as unhappy as you've always been.
Since my father died, I've received a few other small windfalls (and a very large windfall when I sold Get Rich Slowly). With time, I've developed a system for handling these situations.
If you receive a chunk of cash, I recommend that you:
Keep 5 percent to treat yourself and your family. Let's be realistic. If you receive $1,000 or $10,000 or $100,000 unexpectedly, you're going to want to spend some of it.
No problem. But don't spend all of it. I used to recommend spending 1 percent of a windfall on yourself, but from talking to people, that's not enough. Now I suggest spending 5 percent on fun. That means $50 of a $1,000 windfall, $500 of a $10,000 windfall, or $5,000 of a $100,000 windfall. Don't be tempted to spend more!
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