Most people tend to feel that money is tight most of the time. In reality, we do get financial windfalls every once in a while. Windfalls like tax refunds, a raise, annual bonuses, commissions and more.
In the groundbreaking book, "The Millionnaire Next Door", Stanley Thomas compares what millionaires do with a financial windfall versus what the Average Joe does. According to Henley's research, the Average Joe usually spends the money whereas millionaires do the exact opposite.
Here are some ideas for what you should do the next time you receive a financial windfall.
Save it immediately.
I had a family member tell me something quite alarming recently. One of their coworkers got a promotion (and therefore a pay bump) and my family member noticed how this person was now buying stuff from Amazon on a daily basis.
Sometimes this personal would just go to Amazon with no specific purpose except to find something to spend their money on. This, my friends, is why we get into trouble with our money.
Instead of falling victim to lifestyle inflation, you're better off taking the extra income off the top and putting it into savings.
For example, I recently found myself needing to dip into my emergency fund while I was traveling abroad. Two months later I experienced a financial windfall. Instead of spending the money, I used it to replenish my emergency fund. Now I don't have to worry if the car breaks or I end up at the doctor's office because I'm covered.
Pay off your debt.
The least fun thing ever, I know.
If you're still working on paying off your debt, then you may want to use a financial windfall to put a dent in your outstanding balance.
Debt - particularly consumer debt - ties our future to our past, so the faster you can unshackle yourself from it the faster you can start enjoying your money again.
The reality is there's a whole lot more you can do when you're money isn't tied up in debt. Because I've been very conscious about my debt and made sure to always pay my credit card balances in full each month, I've been able to spend money traveling. I was also able to bootstrap a business because I had the money to do it.
Just a quick note about paying off debt and saving. Ideally, you'll want to do both, that way if you have an emergency of some sort you don't need to rely on credit and continue the cycle. Since that's the case, maybe you decide part of your financial windfall goes to debt repayment and the other part goes to savings.
If you have no consumer debt (or it's manageable) and you have enough liquid savings in the bank to get you through an emergency, then you may want to consider investing your financial windfall.
Truth be told, this is what I'm doing much more of recently. For example, I recently decided that any money I earn from affiliate sales on my blog will go to my IRA.
Additionally, I currently have my 'Down Payment on a Property' savings in index funds because I don't plan on being able to touch the money for years and would like to see some market returns in the meantime. When I received a windfall earlier this month I immediately
Financial windfalls should be taken seriously. It’s not money for you to spend, it’s money you can use to build wealth. Is this an easy thing to do? No. But, it is worth it in the long run.
Your future self will thank you.