Monday, May 20, 2013

Preparing for a Financial Windfall

Inspired by this post at Get Rich Slowly, I decided it would be a good exercise to come up with a plan for what I would do in the case of a financial windfall.

What if I came in to money suddenly? How would I handle it? I don’t think this is highly probable or even possible, but it is fun to think about, nonetheless.
One good piece of advice is to sit on much of the money until the emotion wears off. This allows you to take a step back from the situation and really assess. Put the money in a savings account and don’t touch it for six months. But after that? What would I do?

To figure this out, I’ve listed some windfall ranges below and written down how I would handle each one.

1k-10k
1. Put towards paying off student loan debt
What if you were rolling in the dough?

10k-25k
1. Pay off remaining student loan debt ~$12k
2. Get emergency fund up to 6 months of expenses ~ $11k
3. Take a trip to a country I’ve never been to ~$2k

25k-50k

1. Pay off remaining student loan debt ~$12k
2. Get emergency fund up to 6 months expenses ~$11k
3. Take a trip to a country I’ve never been to ~$2k
4. Invest the rest (Max out Roth IRA and start a Traditional IRA) ~$11k
5. Start a “house fund” - money for when I want to buy my own place ~$14k

50k-100k
1. Pay off remaining student loan debt ~$12k
2. Get emergency fund up to 6 months expenses ~$11k
3. Take a trip to a country I’ve never been to ~$2k
4. Max out Roth IRA and start a Traditional IRA ~$11k
5. Use half of the remaining funds to start a “house fund” - money for when I want to buy my own place ~$32k
6. Use the rest to help my parents (either put money towards their debt or start another retirement account for them) ~$32k

100k and above
1. Pay off remaining student loan debt ~$12k
2. Get emergency fund up to 6 months expenses ~$11k
3. Take a trip to a country I’ve never been to ~$2k
4. Max out Roth IRA and start a Traditional IRA ~$11k
5. Put ½ of the remaining towards a “house fund” - money for when I want to buy my own place
6. Put ¼ of the rest towards helping my parents (either put money towards their debt or start another retirement account for them)
7. Contribute the remaining ¼ to charity. Ideas: Give a loan via kiva.org; Gift an endowment to my alma mater; Set up a study abroad or language scholarship at my high school; Donate to a local nursing home, assisted living, or hospice

What are the results? Well, they don't surprise me too much. The first two items on each list - paying down debt and stashing money away in my emergency fund - are two of my financial goals without a windfall. I can also see that I value four other things: exploring a new place, saving for retirement, saving for a home, and helping my parents. These plans fit with my values, and in a moment of emotion, it will be a good list to have to return to. Monetary decisions are largely emotional, so anything I can do to remind myself of my priorities will help!

What would you do with a financial windfall? Do you think you would splurge? Would you help your family? Save for retirement? Donate to charity?

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