Windfall Level Cash Questions

[2kwik4u]

TL;DR at the bottom. Novel length post from here down.

The definition from the dictionary just says a "large sum" of income or profit increase constitutes a "windfall". I've found several articles on how to handle it, but none really specify an amount. I'm guessing it's different for everyone. Someone with an income in the $40k range would call $4k a windfall. Someone in the $500k income range might need $50k or more to have to really consider it a large increase. What would you consider a windfall amount?

Any of you ever had a "Windfall" of cash? Like a relative passing along a big chunk of money, or an unexpected work bonus show up, or win the lottery? If you have, and you don't mind sharing, where did it come from?

If you did have an event like this, what did you (or what would you) do with it? Going back to the few articles I've read there are some clear patterns on how to set yourself up for success in the future, and they all pretty much say the same thing. Spend a little now to enjoy it, and save the rest for the future. No real talk of "The Hangover" levels of shenanigans in Las Vegas, or anything like that. Lots of talk of investing, saving, and otherwise future proofing your finances. I'm sure the theories on where and how to invest are as varied as the places the money came from and the amount that came in.

SO......I've lived my life, well into my 30's, paycheck to paycheck. Both parents are really bad with money. I had no idea how credit worked, or how to favorably manage any I had until just recently. I'm ~10yrs into being financially stable at this point. I've always paid my bills and have good credit, but I've also always been without more than $1k in savings, and covered most "life events" with credit cards that might or might not have been paid off completely. In general, I'm more impulsive with cash and spending than I am a planner and saver. Reference the recent camper acquisition as evidence of how fast I'll move on something of somewhat large scale.

I'm looking at some changes at work that will result in an influx of cash of ~3-4x our annual income as a one time event. Clearly I don't want to inflate my lifestyle, and I don't want to imitate my parents by blowing all the cash. I also don't want to lose my butt on taxes this year. However, I don't want to go all Dave Ramsey either and just completely save all of it and clear balance sheets just to say they're zero without enjoying my success at some level. A few years ago I got a "finance guy" that helped me roll a tiny little 401k from one job into an IRA that he has managed since. He's helped us get wills together, and life insurance setup. I trust him pretty implicitly, but he tends to err a shade on the conservative side of us (as he should, and I appreciate that), so I have the tools at my disposal to invest, or spend, or sit on this impending influx.

My first thought is to take 5-10% and have "fun" with it, enjoy the fruits of our labor at some level and get either something nice, or go somewhere nice, or whatever. From there. Pay off anything with interest over ~12% or so. We have some outstanding loans and credit cards that will just go away. I chose 12% as it's about half of what my finance guy has returned me, on average, in my investments with him over the last 5 years. From there, I'll be fully funding ROTH IRA's or myself and my wife, and fully funding 529 plans for the boys to set them up for the future. With the remainder, I'm thinking I'll just drop it in an investment account my guy can manage, and let it sit. That plan frees enough cash to live VERY comfortably for the foreseeable future, and I think sets us up to succeed in retirement (which is still ~18yrs out for both of us).

In general, I find the people on this board to be level headed, and pretty damn sharp in regards to most life decisions. So I pose the question; what would you do (or what DID you do) with a windfall level of cash?

TL;DR.....I'm getting some cash and am typing out my thoughts to the forum, asking for insights, and thoughts, and general curiosity about how others have handled similar situations.

 

[Coult45]

Great questions, and some really solid thought processes. My priorities, once we had enough coming in each month above living expenses, was fund the 401k and the 529s. And we hammered away at both of those for many years at whatever level we could at the time. We weren’t trying to save enough to pay for private schools, but we were able to get both kids through NY state schools debt-free with some input from them as well. From the time they were very young, any cash they got from jobs or gifts was split 50/50…half went in their pockets and half went to the bank for special purchases and school savings. When the time came, they were able to contribute at a material level to those college expenses. It created some accountability on their part. And during the college years, we scaled the vacations back to redirect a little more money to the college bills each year.

We always planned on my bonuses coming in at zero, so any bonus was a windfall to some degree. When bonuses were small, that was our vacation fund. Made good vacations just a little better. When they got a little bigger, a little might go to a special purchase, a little would go to a vacation, and the majority would go to home improvements and any nagging credit debts at higher interests.

I got two unexpected windfall bonuses last year. One was within a few hundred dollars of the cost of the new lift I was dreaming about for my new boat. When i told my wife about the bonus, she said “that’s about the cost of that lift, right? You should get it.” The other unexpected bonus last year is going to help me retire a few months earlier. Gives me a few extra months before i need to start tapping that 401k next year.

 

[scokill]

Personally I would delete this. I know this is a fairly tight knit and good group of people, but the internet is not a good place for this type of information.

 

[HangOutdoors]

Personally I would delete this. I know this is a fairly tight knit and good group of people, but the internet is not a good place for this type of information.

Definately agree. Our forums are public, doesn't take much to come across this info.

Also talk with some solid financial planners. Internet advice is questionable and may not work for you in your own scenario.

 

[I_squared_r]

I am generally very good with my money. I grew up poor with parents who made and continue to make horrible financial decisions so I have to build wealth on my own. Everyone in my family lives paycheck-to-paycheck. I constantly budget and plan for the future so I'm doing well compared to most people my age (32). If I came in to a lot of money, I would pay down any credit card debt, ensure that I have enough to cover 2 years living expense (put it in 2.5% CD's), and invest the remainder of it. The extra money wouldn't influence me to buy anything that I hadn't already considered to buy. The reason being, is that I would prefer to increase my income prior to increasing my standard of living. There is a fine line between enjoying life now and preparing for the future.

Maybe it's a little off topic, but here is one of my beliefs about personal finance: I see too many people are chasing material goods instead of chasing a lifestyle. There's no issue in chasing materialistic things, but some people take it to an extreme and constantly stretch their budget to impress others or feel happier. And whether they realize it or not, it negatively impacts their mood. A guy who drives a car $70k+ and his behavior on the road is as if 1 thing is going to set him off and he's going to drive that truck into a brick wall. I can tell you multiple people who own big cabin cruisers, house on the water, vacations, etc. and I've seen little things set them off and they go freaking out and screaming. A guy in a $70k RAM, pulling a $80k boat at the boat ramp screaming in a racist tirade because he had to wait 5 minutes for the ramp. These people aren't happy and I don't envy these people. I envy the guy who is driving a Honda Accord and is always calm and happy. Therefore I lean towards being conservative and preparing more for the future. But with careful planning, I enable myself to live a great life without over extending myself.

 

[zipper]

TL;DR at the bottom. Novel length post from here down.

The definition from the dictionary just says a "large sum" of income or profit increase constitutes a "windfall". I've found several articles on how to handle it, but none really specify an amount. I'm guessing it's different for everyone. Someone with an income in the $40k range would call $4k a windfall. Someone in the $500k income range might need $50k or more to have to really consider it a large increase. What would you consider a windfall amount?

Any of you ever had a "Windfall" of cash? Like a relative passing along a big chunk of money, or an unexpected work bonus show up, or win the lottery? If you have, and you don't mind sharing, where did it come from?

If you did have an event like this, what did you (or what would you) do with it? Going back to the few articles I've read there are some clear patterns on how to set yourself up for success in the future, and they all pretty much say the same thing. Spend a little now to enjoy it, and save the rest for the future. No real talk of "The Hangover" levels of shenanigans in Las Vegas, or anything like that. Lots of talk of investing, saving, and otherwise future proofing your finances. I'm sure the theories on where and how to invest are as varied as the places the money came from and the amount that came in.

SO......I've lived my life, well into my 30's, paycheck to paycheck. Both parents are really bad with money. I had no idea how credit worked, or how to favorably manage any I had until just recently. I'm ~10yrs into being financially stable at this point. I've always paid my bills and have good credit, but I've also always been without more than $1k in savings, and covered most "life events" with credit cards that might or might not have been paid off completely. In general, I'm more impulsive with cash and spending than I am a planner and saver. Reference the recent camper acquisition as evidence of how fast I'll move on something of somewhat large scale.

I'm looking at some changes at work that will result in an influx of cash of ~3-4x our annual income as a one time event. Clearly I don't want to inflate my lifestyle, and I don't want to imitate my parents by blowing all the cash. I also don't want to lose my butt on taxes this year. However, I don't want to go all Dave Ramsey either and just completely save all of it and clear balance sheets just to say they're zero without enjoying my success at some level. A few years ago I got a "finance guy" that helped me roll a tiny little 401k from one job into an IRA that he has managed since. He's helped us get wills together, and life insurance setup. I trust him pretty implicitly, but he tends to err a shade on the conservative side of us (as he should, and I appreciate that), so I have the tools at my disposal to invest, or spend, or sit on this impending influx.

My first thought is to take 5-10% and have "fun" with it, enjoy the fruits of our labor at some level and get either something nice, or go somewhere nice, or whatever. From there. Pay off anything with interest over ~12% or so. We have some outstanding loans and credit cards that will just go away. I chose 12% as it's about half of what my finance guy has returned me, on average, in my investments with him over the last 5 years. From there, I'll be fully funding ROTH IRA's or myself and my wife, and fully funding 529 plans for the boys to set them up for the future. With the remainder, I'm thinking I'll just drop it in an investment account my guy can manage, and let it sit. That plan frees enough cash to live VERY comfortably for the foreseeable future, and I think sets us up to succeed in retirement (which is still ~18yrs out for both of us).

In general, I find the people on this board to be level headed, and pretty damn sharp in regards to most life decisions. So I pose the question; what would you do (or what DID you do) with a windfall level of cash?

TL;DR.....I'm getting some cash and am typing out my thoughts to the forum, asking for insights, and thoughts, and general curiosity about how others have handled similar situations.

Hey, aren’t we 3rd cousins or something like that, on my mothers side. Lol, they’ll be coming out of the woodwork now.

 

[Taylorman]

If you haven’t already I suggest consulting a tax professional to understand all tax obligations, both now and in the years ahead, related to this ‘windfall’ and your plans for the money. Additionally, depending on the source of the money you may want to consult a lawyer to understand any potential liability. E.g. if it’s an inheritance can anyone challenge the will and how long do they have to do so; if it’s the sale of a company what rights does the buyer have and how long are they enforceable. Taxes and liabilities are, essentially, a lien on that money and spending more than that lien amount is not advisable.

 

[Julian]

My best advice is find a good accountant and take their advice! For $3-500 they can look over what you are doing and give you suggestions.
My next advice is put as much as you can into your 401K (if you have one - half of Americans do), and make sure you are putting in AT LEAST what your company matches or you are throwing away income. If no 401K open a Roth account.

If you are over 50 you should be maxing out your 401k contributions annually, and taking advantage of the catch up amounts too. IDEALLY you want to hit your target well before your retirement age so you can retire early (BEFORE you are too old to use the money to do fun things).

The one thing I wish I'd done earlier was invest in real estate - properties you can rent out - either commercial or residential.

 

[AZMark]

I was going to say you need Dave Ramsey but I see you shot that down.

Seriously though, I am very responsible with money but I still listen to/read things like that to keep it top of mind and keep some good perspective. I do not do the zero debt thing as I don’t think that makes sense for people with stable careers and predictable future income. Just keep it very very manageable and your life will be much lower stress, which I’ve found to be a very worthwhile trade off.

On interest, if you’re paying over about 6% on anything you should pay that off given the size of windfall you’re talking about. 12% is getting into bad types of debt or not so great credit, much too high of a target imho.

Do not make the financial plans for the rest of your life expecting 24% returns on investments. That is crazy.

 

[TeenGee]

We paid off our house. That freed up cash flow and lowered monthly expenses.

 

[adrianp89]

If it's large enough. I would re-invest it in property. Personally I would do an AirBNB property. Yes it adds an expense, but that expense will be a second source of income for you. If you have 20%, you can get a rental loan and it's a very simple loan process, no tax documents, no DTI check, etc.

 

[johnso30]

I was going to say you need Dave Ramsey but I see you shot that down.

Seriously though, I am very responsible with money but I still listen to/read things like that to keep it top of mind and keep some good perspective. I do not do the zero debt thing as I don’t think that makes sense for people with stable careers and predictable future income. Just keep it very very manageable and your life will be much lower stress, which I’ve found to be a very worthwhile trade off.

On interest, if you’re paying over about 6% on anything you should pay that off given the size of windfall you’re talking about. 12% is getting into bad types of debt or not so great credit, much too high of a target imho.

Do not make the financial plans for the rest of your life expecting 24% returns on investments. That is crazy.

Woah, it’s like we were doing a mind meld… I was getting ready to say all this as well.

The past 5 years have seen way higher returns than normal. Very likely that the markets will have some correction in them in the next few years and investment returns will be lower than “normal”.

 

[GTBRMC]

On interest, if you’re paying over about 6% on anything you should pay that off given the size of windfall you’re talking about. 12% is getting into bad types of debt or not so great credit, much too high of a target imho.

Do not make the financial plans for the rest of your life expecting 24% returns on investments. That is crazy.

Several pieces of good advice on this thread so far.

Agree with deleting this thread once you get input you seek. This site is better than most in terms of community, intent of members and owners/managers, etc. It also has relatively good security for such a site (or so it seems). It is not bank / investment level secured (I assume - no evidence of encryption, multi-factor authentication, etc.). It IS remarkably easy for a semi-sophisticated bad actor to figure out who you are and attack your identity, etc.

Agree with your idea to take a small amount of windfall and play / have fun with it. That amount / percentage of your windfall is up to you - how much you value shorter term vs longer term goals (maximize memories when kids are young vs max’ing your retirement lifestyle, etc.). There are many financial factors to consider: tax implications, your expected retirement funding needs, age at which you expect to retire, investment risk tolerance, and projected rate of return going forward being several of the big ones.

Which brings us to that 24% average annual return, over five years. Certainly, it is possible your investment person wisely guided you through all the turbulent times of the last several years exceptionally well. 24% simple average annual return rate is nearly double what the S&P 500 delivered over the same period at 13.8%. The average US mutual fund has returned 6.9% over the last 5 years. (Both these data points are from large, publicly available websites from recent snapshots).

For us lowly retail investors, the chances of outpacing the S&P 500 by 74% or the typical US mutual fund by 248% over any length of time is essentially zero, no matter how clever our investment guy is. Strongly advise having a tax accountant not only review your plans but also your recent & current investments - just to make sure it passes the smell test.

Best of luck to you as you sort this all out and make your value decisions. You are already well ahead of the curve as you are intentionally thinking through your options and you are seeking insight from others. Strongly suggest you bounce your plan off pros vs taking any investment advice from “your fake internet friends.” ***

***My wife’s description of my online contacts made through JB.net and “the other website” before we went to Shelbyville and determined that the people are, in fact, real

 

[2kwik4u]

Hey, aren’t we 3rd cousins or something like that, on my mothers side. Lol, they’ll be coming out of the woodwork now.

It's not that much cash. 3-4x not much is still not very much

 

[Julian]

We paid off our house. That freed up cash flow and lowered monthly expenses.

I've often thought about paying off my mortgage, but as I have 18 years left on my 30 year mortgage, I've already paid for the priveledge of the loan. I'm better off leaving the money in the market as I'll make more in interest than I'd save. The market would have to gain less than 4% for it to be worth my while, and my funds over the 20 years I've owned them have done better than that. That assumes I put all the mortgage savings back into the market monthly - if you spend that money, then it drops to 2%.

But there is something to say for the peace of mind of not having a mortgage payment. I'm going to ask my accountant to run the numbers on this again.....but right now is not the time to be selling of equities to pay off your mortgage.....that would have been last December!

 

[BigN8]

Park all the cash in a money market at your bank and forget about it, for a set period of time. Let’s say 6 Months. This will give you time to dream about all the impulse purchases then analyze the pros and cons of each purchase. You’ll do this over and over. By the end of the 6 Months you’ll have found that you aren’t as interested in spending the money and you like the fact the balance in the account is a warm safety blanket.

 

[TimW451]

1. Don’t tell anyone
2. Payoff high interest loans
3. Buy/do something important you’d never be able to do otherwise, buy a house, college tuition, retirement.
4. Buy/do something frivolous that you’d never be able to do otherwise (that doesn’t advertise “I just got money.”) family vacation, pool, labradoodle.
5. Donate to your favorite website

 

[John McLaughlin]

Not sure of your age however if still young (I am 78 so i would look at a windfall differently) take some and enjoy and find a good investment advisor an invest it in mutual funds both stocks and bonds. You must decide the risk you are willing to take. What you don’t want is to lie awake at night worrying about it as we have little control over the market. Also you said your parents were not good money planners. Well I will tell you the advice my Dad gave me regarding pay raises. Invest a minimum of ten percent as you do not really need it. I ask why and he said you are living OK with out it. Side not my Dad was a maintenance man and I doubt he ever made more then 12000 dollars a year. However when he died he left my Mom over a half million. Because of his philosophy they were able to take cruises and buy a new car when they wanted to in retirement.

 

[Bluewater272]

Not an investment professional, and havent had a windfall like you're describing, but just a couple thoughts below. I think you're on the right track with your planning.

• Have a little fun with the windfall - take a nice trip, buy yourself something nice, but dont piss it all away.
• Not sure what your income is, but a 3-4x injection of our annual income would not be a life altering event, despite it being a not insignificant sum. Life's wild, and something as simple as a serious medical issue can derail what you spent 10 years building.
• Your investment experience over the last 5 years is beyond atypical. Its even atypical for someone who perfectly timed the covid crash and recovery. I would not set your interest rate debt elimination threshold there, and for your future retirement planning purposes you should really plan ~10%.
• I would pay off any non-appreciating debt you have before considering anything else, especially given your stated history of being impulsive. I had more fun paying off the boat last year than I did when I signed the loan papers a couple years earlier.
• Eliminating your debt servicing burden frees you financially, making it less likely you'll live paycheck to paycheck, and better able to save and plan for large purchases, trips, retirement, etc. You'll also be able to invest far more than you did before.
• Since you've never had more than $1K in savings, you should protect that. Not something I feel the need to do personally, but a good suggestion to protect some of this windfall would be to buy a series of CDs, 1/2/3 years, and recycle them as they mature - that way in case things turn south, you wont have to wait too long for a bolus of cash to become available.
• Don't worry about the taxes. They are what they are, and the government will get their cut somehow. There's very little you can do to mitigate the tax liability for an unexpected one-time payment. Just take 35% of the sum and mentally throw it away, you'll get some of it back at tax time. If you have kids, you might want to put a big chunk in their 529 or something, in addition to funding your IRAs for the year.

At the end of this, would be nice for you to have no debt other than your mortgage, a nice healthy safety net, some more investments, maybe something shiny for you and the wife and a nice memory from an awesome vacation. Then just keep living your life getting on more independent financial footing, as you have been working toward.

 

[BlkGS]

A couple questions first.

1) Is it a chunk of money, or coming in over time? This will determine how much you actually get vs how much gets eaten by the govt.

2) What's your debt situation like? I think you said earlier you've got student loans (you wanted others to pay off ) and a mortgage.

3) Are there any other big expenses you could see coming up? Outgrowing your house, burning your Q7 to the ground, etc

4) How much liquid cash do you have on hand? 6 months expenses? A year? Less than that?

Those 4 questions are going to guide you forward. In general, you want to have expenses covered for 6 months, then pay off debts, then have money allocated for upcoming expenses, then whatever else (fun or investments).

Personally, I'd hold off on doing much investing right now. With interest rates spiking, I'd expect to see some major losses in the stock markets and real estate markets over the next couple years. With the recession just having started, I'd be cautious and try to keep cash on hand. A windfall now doesn't prevent hard times down the road. I suspect that as this recession takes hold more and more, a lot of.people are going to be over extended. People whonfollowed the YouTuber fad of buying up every rental property they can get a loan for are especially going to be screwed.