Tip of The Week: Don’t Bank on Financial Windfalls

One of the most common daydreams among people both young and old is having a large amount of money dropped in your lap out of nowhere. Whether it’s a sudden inheritance or a hefty tax return it’s easy to let yourself dream about all the things you could use a large financial windfall for, whether it’s a new car, larger house, home improvement projects or a dream vacation the list can go on and on. While it’s fun to dream about financial windfalls coming your way, it’s important to understand the difference between dreaming and reality when it comes to your budget.

financial windfalls

As a lot of people start working on their personal budgets they start daydreaming about how they can pay certain bills or mortgages off faster if they had a financial windfall come their way. Sometimes if people aren’t careful they’ll start banking on these financial windfalls coming their way and justify new purchases based on the hope that somehow they’ll get a bunch of money out of nowhere. Some of the most common windfalls that people bank on include:

Tax Return- This is by far the most common windfall that people seem to bank on. Tax returns can be an amazing way to quickly build up your savings but because of all the marketing directed at people on how they should spend their tax return people usually end up throwing away their tax returns on more consumer debt such as a bigger tv, new appliances, etc… While there are sometimes legitimate uses for your tax return such as fixing a leaky roof, vehicle repairs etc.. if you are truly trying to improve your financial situation you should use your tax return to either pay down your consumer debt or put the money into savings.

Salary Bonus or Raise- If you’re fortunate enough to have a job in this economy you should consider yourself lucky. If you are even more fortunate to work for a company that is doing so well that it has a surplus to offer as bonuses to their employees you are very fortunate. A downside to bonus or a raise is that it can lead people to irrational spending. If you know that a bonus or raise is coming your way it can lead you rationalizing big purchases with the thought that you’ll be able to pay for it once your big bonus comes through. The problem with that thought process is the fact that you never know for sure how much your bonus or hopeful raise is going to be, another thing that a lot of people don’t want to think about is that sometimes when bonuses are supposed to be released, companies will sometimes do layoffs instead because they’ve been looking at the numbers and they realize that they need to do something drastic to improve the numbers for the quarter. If you make several big purchases leading up to a raise or bonus and end up getting laid off instead it can put you in a very tough spot financially.

Unexpected Inheritance- Time and time again you’ll see this windfall used as the source for movie and television show storylines. The classic story of a distant relative leaving millions of dollars to you is a nice story but not likely to happen. With so many movies and television shows using an “unexpected inheritance” as a storyline it’s no wonder that so many people think that it could happen to them. While it’s fun to dream about, it’s just not realistic to spend irresponsibly with the hope that a distant relative is going to pass away and leave thousands or millions of dollars in your name. As crazy as it may sound, sometimes people don’t even bank off of a distant relative leaving them a large sum of money, sometimes people will dig themselves into a large financial hole thinking that their elderly parents or grandparents will pass away soon only to find out that there was little or no inheritance to be had. In addition to just being distasteful it’s a poor financial move as well.

Lawsuit Settlement- With this point we’re not discussing frivolous lawsuits, but the fact that sometimes people find themselves the victim of an accident or have been injured in some other way and are workings towards a settlement that will help them overcome the pain or injury caused by the accident. Sometimes people will look at a lawsuit settlement as a great way to get have some extra money but what they need to take a serious look at is that even though these settlements will cover the major medical bills, you’re most likely only rewarded money for “damages” if they feel that you’re going to have some ongoing pain or discomfort as a result of the accident which could mean future medical bills and other expenses. So while it may be tempting to spend your new found money on consumer products, set the money aside, maybe even in a different account to help pay for additional medical bills that may come in the future.

Regardless of whether or not you do find yourself the beneficiary of a financial windfall in the future, the key is to be disciplined and stick to your personal budget. If you have some money land in your lap unexpectedly, pay down your debts or put it in the bank and act like it never happened. That way you will be able to move closer to your goal of financial independence.

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