What to do with a Financial Windfall

June 4th, 2019 post featured image

Let’s be honest, some days a financial windfall can be finding a toonie in your winter coat! A financial windfall can come in many forms from a tax return, an inheritance, or even a pay increase at work.

When we know or think we might be getting a financial windfall, like a tax return, it is common for most of us to begin planning how to put that money to use.

Perhaps you have been putting off buying a new entertainment system for your family room or taking a much-needed vacation. Or maybe your purchase desires fall into the more practical spectrum like re-shingling your home or paying down debt. In any case, when a windfall comes in there are multiple ways you can spend it.

A windfall is usually just that, an influx of unexpected funds. The key word being unexpected. Because you weren’t expecting it, it is easy to allocate it to a ‘special’ purchase; however, it is also a great time to hive off a portion, or all of it and add it to your investment portfolio.

Using some of your windfall to deposit into your investment portfolio comes with many benefits. At a minimum, an additional or unexpected deposit will get you to your goals a little quicker and allow you to benefit from buying and holding a long-term investment.

Using all or a portion of your windfall to pay down your debt is also a practical way to get you closer to your financial goals. Often interest paid on consumer debt is much higher than what you will benefit from with an investment. Clearing the debt will help in both the long- and short-term.

A common ‘windfall’ is when you receive a pay increase at work. You have likely deserved if for a while and may have even begun dreaming about what impact a pay increase will have on your monthly budget.

Before you allocate the pay increase, consider this: If you have built your budget around your current income, allocate the new pay increase to savings or debt repayment.

Each of us, as we go through our adult lives and careers, expand our responsibilities and list of ongoing expenses. How many are truly necessities versus luxuries varies by person. However, one thing nearly all of us are guilty of is lifestyle creep.

Lifestyle creep is when you become accustomed to the income you have and as your income increases so does your lifestyle. Early on in our careers this is appropriate as our expenses and responsibilities increase to match our income. However, once you have achieved a certain level, you should measure and consider each new expense you add to keep any lifestyle creep to a minimum.

If you are happy with your income-to-expense ratio and are living comfortably, consider using your pay increase ‘windfall’ as a way to increase your savings or debt repayment. After all, if you are happy with your lifestyle, you might as well put all or part of the ‘new’ money to a different use. Allocating the increase to debt or savings right away means you won’t miss it and your bank account will be none the wiser.

Additional, regular deposits into your investment portfolio allow you to take advantage of dollar cost averaging, buy and hold and achieving your goals at an accelerated pace.

Connect with us to talk about the best way to put your next windfall to use.