Windfalls: What Is It & How to Budget for One

Income windfalls: how to plan & budget for a sudden influx of money.

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After a month hiatus, I am back to blogging!

I’ve spent the last few weeks hiding in bed and watching Netflix (currently obsessed with Shameless). No, not because I am lazy. I had a tonsillectomy. If you still have your tonsils… KEEP THEM! I thought I had prepared for the worst, but the pain was even worse than I had anticipated. Many people say a tonsillectomy as an adult is worse than child birth. Ouch!

Let’s talk about a topic that is a bit less painful: windfalls. Chances are you have received a windfall at least once in your life. Do you know what one is and how to budget for it?

Don't be caught off guard by a windfall. Read on to learn how to plan for a sudden influx of cash!

What is a windfall?

Anytime you receive a lump sum of cash you have received a windfall. This income may come from winning a contest or the lottery, receiving birthday money, receiving an inheritance, a large tax refund, or even from getting a bonus at work. Windfalls may be unexpected, such as winning big at the casino, or you may have anticipated a windfall, such as a salary increase. Regardless of whether or not the cash is a surprise, you should be strategic in how you handle this increase in income.

Related: Top 5 Tax Deductions for Entrepreneurs

How do I budget for windfalls?

The wonderful thing about receiving a financial windfall is that you can use it to further your financial goals! You will want to be strategic with this income. Here are the recommended ways to spend your windfall cash:

Set Aside ‘Treat Yo’ Self Money’

It’s pretty hard not to treat yourself when you get a sudden influx of cash. It will be tempting to spend it frivolously anyways, so why not set some aside specifically for this purpose? Is there a certain item you’ve been lusting over? BUY IT!

The big question is how much should you spend? The answer is that it depends! I would recommend spending no more than 10% on yourself. For example, if you receive a $1,000 windfall, you can spend $100 on yourself. Remember, the less you spend on yourself the more you can use to reach your financial goals!

Start Your Emergency Fund (Or Beef It Up!)

One of the most important safety nets you can have in your financial plan is your emergency fund. An emergency fund is savings you have set aside for a true emergency (no, a fashion emergency does not count!).

If you don’t already have an emergency fund, open up a high-interest savings account and deposit some of your windfall cash into it. It is often recommended that you start with a small emergency fund of $1,000.

Once you have your small emergency fund saved, it’s time to beef it up! It is recommended that you have at least 3 months worth of living expenses in your emergency fund to protect you from a major emergency, such as losing your job.

Pay Down Your Debt

Let’s get rid of that pesky debt! After having an emergency fund, this is your next most important priority. Not only will this free up money in the future by decreasing your monthly payments, it will also be a great psychological relief.

Be strategic when you choose which debts to pay off first. Ideally, you will pay off your debt with the highest interest rate first in order to prevent paying extra interest charges. If you have debt with a small balance (one that can be wiped out completely by your windfall), I would recommend you pay off the small debt first. Paying off a debt in its entirety can be hugely motivating!

Have you ever received a financial windfall? How did you spend/save it?

12 Comment

  1. These are excellent ideas! Thanks for the useful 10% tip. We are paying off student loan debt, and expect to have it paid off by August. It’s a big source of excitement for us!
    Alex recently posted…Being a Team in Marriage

    1. How exciting! I can’t wait for the day I can pay off my student loans. It still seems so far away!

  2. This is so true. Many people don’t realize the need for preparation and end up spending the money carelessly. Investment is always a good idea.

    1. I 100% agree. Investing is always a great option! Might as well make that windfall money work for you!

  3. OMG I’m so waiting for my tax refund! And I actually have a frivolous purse fund. For the past few years, I’ll try to put away cash every month in a separate savings account. I probably have more than enough to buy my Chanel purse, but I’m still waiting to pull the trigger. eeks! But it’ll be good to treat myself!

    xoxo,
    Berniedette | http://www.petiteandtoned.com
    Berniedette of PetiteAndToned.com recently posted…10 Tips on Practicing Good Gym Etiquette

    1. That’s so exciting! It will feel so good to finally get that new purse in your hands!

  4. This is really great advice. I think it’s important to treat yourself so that you don’t go all crazy but investing and protecting the lion share is so important too.

    1. So glad you enjoyed my post, Jackie!

  5. how much money would you say is a windfall? an extra ten here or there doesn’t seem like it, but $1000, while great, isn’t as exciting as a cool million!

    1. Hi, Joe. That is a GREAT question. The answer is that it depends. It depends on what stage of life you are in, how much money you make, how much you have for savings, etc. Personally, I would classify anything over $1,000 as a windfall. This number is low but that is because I have little savings and a lot of debt. Every little bit helps when you are trying to reach your financial goals!

  6. These are really awesome tips!! I haven’t been in single in a while but definitely remember the days of trying to balance wants vs. needs to help keep my budget on track.

    1. So glad you enjoyed my tips! 🙂

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