What Would You Do with a Windfall?

Here's a note I recently received from a reader:

Just had a relative come across a $50k windfall after taxes. It had me thinking of what the best thing to do with the money.  This is especially interesting if you are debt free.  How can you make the most out of this?

I have a few thoughts on this:

1. $50k is a nice amount to "fall into", but it's not life-changing. It's not like I'm going to retire on $50k. Now if the amount was $2 million, we're in a whole different ballpark!

2. I'd probably be fairly boring with my $50k -- giving some, saving most, and spending a bit.

3. What would I suggest others do? Get an emergency fund, pay off debt, and save. Again -- boring.

4. I think it would be fine to spend some of it -- maybe $10k -- but I wouldn't blow it all on things like an expensive vacation, a boat, etc. Then again, it's your money, so do what you like with it. I'm just telling you what I thing you should do -- which may be worth what you paid for the advice. ;-)

5. The closest thing we've ever received to a wind fall was $10k or so when my wife's father passed away. It was a nice amount to receive (obviously, we would rather have had him live longer and not gotten the money at all), but again it wasn't life-changing.

How about you? What would you do with a financial windfall? Have you ever received one?

Comments

[JimL]

For me:

Give - $7500

Buy - Epson Home Cinema 8500UB (front projector), upgrade from older projector, cost of approximately $2500

Save - $40,000

[Mark]

Received one about 15 years ago. Was even more boring than FMF. Paid an extra $40,000 into the mortgage. No changes in my life or lifestyle: investments, savings, giving, spending.

[Miranda]

I'm all about boring! If I had a windfall, give some away, I'd save most of it, pay down some student debt and maybe splurge on something fun.

[Rhea]

I was in my 20s when my mother died (my dad had already died) and I got a bunch of money. The problem was, I was so young that I squandered a bunch of it. I still have some of it, but I wish I'd been more forward-thinking back then.

[Lee]

My wife and I recently received about $20000. Set $1500 aside to pay for vacation in April. The rest was invested for long term. We are fortunate that we have no consumer debt (Both cars paid for. Credit cards paid off every month.) and a fully funded emergency account.

[Beastlike]

Very boring - 5k to church, 45k to the mortgage!

[Holly]

That's an easy 'problem' for me:
Give $2500 to four charities (church, alzheimer's research, St. Jude's Hospital, kids' private schools' financial aid programs). Pay off car loan for $7500. Put the rest in cd's for kids' weddings and college funds.

[billyjobob]

The most boring. Invest it all. Put myself a little closer to my retirement goal..... Well...maybe spend few thousand. Big screen TV or nice vacation..nothing to extravagant.

[CD]

Received about $350k in a lawsuit settlement a couple years ago. 20% to charity, paid off all debt but home, and invested the rest. Invested right at the peak of the market also!

[Jon]

I'm currently facing the same sort of choices. My wife will receive $100K inheritance around the first of the year. Thinking about using it and some $ from savings to pay off the mortgage. This would give us a lot more flexibility in our day to day spending and investing. Could also invest it in some index funds, use it for a down payment on a rental property, build a duplex on property we already own...plenty of options. It's not life-changing as in early retirement, but it could make a difference, with wise choices.

[Patrick]

Received $7200 last year. Saved $1500 and spent $5700 on a once-in-a-decade vacation, a camcorder and a playset for our daughter (craigslist). Would have liked to put some toward our mortgage, but we needed the latter two and wouldn't have otherwise been able to take a nice trip (we usually take the same vacation every year because it's cheap).

[Crystal]

My husband's parents gave my husband what was left of his college fund a few years ago (about $19,000). We used it and some of our own money to put 20% down on our home (about $25,000 total for 20% down and closing fees)...to this day I remind his parents how thankful we are. We love owning our own home and would have had to wait another year if we hadn't had the help.

If we received $50,000 right now, we would put $2500 aside for a vacation and then have two options:

1) We would pay off the car with $11,000-12,000, and put the remaining $36,000 or so towards the principal of our mortgage, which would pay off nearly half of what we have left. We would be able to be completely debt free by 2011-2012 instead of 2015-2016.

2) We could use the remaining $47,500 to put 20% on a rental property and to increase our emergency fund so we'll have padding for the months we cannot successfully rent out the property. This would mean that we would stop overpaying our home mortgage in order to pay off the rental mortgage as quickly as possible. We would probably be able to be completely debt free by 2020 and no later than 2025.

[Jo]

I really could use an extra 50K right now!!

I would guess I would: give some to charity ($5000), save and invest some (10,000), pay off CC, car, and some education debt ($12,000), down-payment on a house ($20,000), and splurge a little and/or buy some furniture for the house would be able to buy now that I had $20,000 to put down ($3000).

[Old Limey]

There's no way we are on target to receive an unexpected lump sum, but here goes anyway.

Charity..................................................... $0.00
Pay off all debt.......................................... $0.00
Large screen TV....................................... $0.00
New Car................................................... $0.00
Next year's vacations paid for already......... $0.00
Add to our Bond market holdings........ $50,000.00

Carry on with our life as normal.

[Concojones]

Several gifts from a generous grandparent, totalling several thousands. I never got myself to spend it, knowing how hard someone worked for it. Besides, I already have everything I desire. So the money went into my investments.

The windfall question reminds me of something. In moments of doubt I sometimes wonder how my life would change if I suddenly had $3M in the bank (or any other figure). Somehow I find it very liberating to realize it wouldn't change a thing, and that I can act like a millionaire right now because millions don't buy me the things I want out of life.

[Crystal]

Old Limey, wasn't there a new car you mentioned you liked in a different post? Like a newer version that was a little different than the one you owned (like a newer BMW or something)? You could splurge on that with a $50,000 windfall...or maybe two vacations a year using business class.

In fact, I wondered before why you don't splurge more often now that you could using just investment interest? Is it simply a frugal mentality?

I was mainly interested since my parents and grandparents actually have started spending more now that they have retired and just live off interest. They say that they can cut back if their interest drops but they figure they don't need to if they are splurging and still living off of 2-3% or less...

[MoneyReasons]

If I had $50,000, I'd put it in a decent dividend yielding stock. Then use the money from the dividend as a fund for certain expenses (perhaps Christmas, Entertainment, or Allowances).

Let's say I was able to get a 5% yield (this is possible with some energy stocks), that works out to be $2,500 a year.

Actually, this is a goal of mine, to buy certain low risk, high dividend yielding stocks and use the dividend as a fund for the kinds of things I mentioned earlier. I'm already doing this with a Lunch experiment that I'm currently doing. But I only have a few thousand dollars as my windfall (more of a whisperfall...), so my yield will only be $100 dollars or so for the first year...

[PDubbs]

Never gotten any significant windfalls, don't expect a dime.

With 50K, I'd first, pay off 35K in student loans my wife and I accumulated in college. Second, replace one of our old, expensive to maintain cars with a used, reliable car (sell or donate the old one). We have a fully funded emergency fund, so anything extra, I'd probably splurge on something fun for my wife and me. I like the sound of a tropical vacation, maybe once we have a few feet of snow and -40 F windchills here in MN.

[Mike Wachowski]

Just sold NYC apartment for $350K (purchased for $30K fifteen years ago).

Immediately vulture-invested the $291K windfall into an underpriced penthouse/ocean view condo (owner had died and estate was unloading it as fast as possible; all-cash offer out-muscled other offers) in California and will move in and rent out current condo.

Will achieve (presumably) far better returns (and standard of living) than locking the money into a 3% CD for 3 years.

[PK]

Let's see. We'd...
$5k charitable donation
$10k max out 2010 IRAs on 1/1
$5k Close out door and window 0% leverages (frees up monthly cash)
$15k Bump up EFund to 12 months expenses and start laddering it
$15 extra principal / refi the house to remove PMI

[D]

Pay down mortgage on our "place" then refinance it to a lower rate & monthly payment and use it as a source of rental income. I would then take the down deposit I already have been saving for a new house and actually use it or maybe even rent a house for a year or so until I found an area of metro DC that I liked....

Easiest decision I'd ever have to make.

[Old Limey]

Crystal:
I already have two vacations planned and paid for, one to Canada the other to Germany and with Business Class on the transatlantic flight.
My 1991 Mercedes is a gas guzzler but I use it once/week, put 500 miles/year on it, and it's a beautiful car inside and out, so why I would I trade it for something newer. The smaller, newer Mercedes gets 20 mpg and we use that as much as possible, we put about 2,500 miles/year on it and it is also in superb shape. I'm not trying to impress young chicks so why would I want to trade it in.

The only two additions to our expenses I have recently made are $20/month to go from Two Buck Chuck as our house wine up to a nicer chardonnay imported from Australia that is $3/bottle, and $5/month at Netflix to go from 1 DVD/at home to 2 DVDs/at home.

I am sure there are many people like us that saved hard and were very frugal when they needed to, the effects of compounding and not changing basic lifestyle very much have done the rest. Believe it or not, there's nothing we need that we don't already have. Another example of my frugality - I have a collection of 30 Coogi and Tundra sweaters purchased on eBay. Yesterday one arrived in the mail that is a true work of art, and to an engineer, is a marvel of computer controlled technology & 3-D looms, it is the best one of all, as new, and it cost me $21.50 - they sell new between $200 - $400. We live comfortably off our pensions and social security checks, the (tax exempt and tax deferred) income from our investment portfolio is about four times as much, gets reinvested, and just keeps compounding.

We would have had a good retirement anyway but we happened to capitalize on the dot.com bubble, a very lucky and once in a lifetime event that was totally unplanned & unanticipated.

[Ken]

Pay of my wife and I's student loans: $27000 roughly
Fix a couple things on my car: $1000
New computer setup for photography: $3000
Put the rest in the house fund: $19000

[Kimberly]

I've never received a large windfall. If I got $50,000 tomorrow, I'd put $20,000 in Roth IRAs for my husband and I for 2009 and 2010, I would take $24,000 and apply it to the mortgage (thus reducing our LTV to 80% and we'd be able to stop paying PMI) and I think we'd use the remaining $6000 to plan a vacation or two.

[MC]

I inherited $60K a couple of years ago--spent it on a kitchen/family room remodel.

The kitchen was un-usable and my house was for that reason essentially unsellable prior to that. Even with the real estate market crashing, my house is still worth $50K more now than it was before the fixup.

If I got such a windfall now? Probably dump it straight into the 529 account--my 2 kids are fast approaching college age!

[FMF]

Old Limey --

Looking at your comment above as well as knowing that you have a high net worth, I'm interested in hearing about your take on giving/donating to charity. Maybe you don't believe in it?

[Tyler]

Depends on who you are and your income, but I always recommend people take any income like this and put it in an account for 6-12 months. (Money market, cds, low risk bonds, etc)

Get it out of your checking account or any account that is easy (check writing) to get funds from. Don't touch it and let yourself get used to having the money.

Then and only then decide how you want to use it.

Many overestimate how much 50k or 100k is and within a few years they have spent all of it on nothing.

[spivey]

Old Limey -

Are you going to Vancouver for the Winter Olympics?

Just wondering, as my wife and I have talked about it. Since it's in Canada, it seems like one of the more affordable Olympic trips possible in the next decade or so, so we are thinking about it.

[carol]

I'd beef up my emergency fund ($26,750) and put the rest toward a minor kitchen remodel ($23,250).

[Holly]

I received a windfall of about 50k, and I do consider that amount life changing. I intend to use the money to pay for my future children's college. Properly invested, it could even grow enough in the next 20-25 years to pay for a few Harvard degrees, should my children be so lucky=) Not having to save for college makes it easier for me to decide to be a SAHM, or have 3 children rather than 2. And, my children can start off their post college lives debt free. I consider this a huge, life changing, blessing and am extremely grateful for it.

[Cyn94601]

ugh...I've had this happen twice and I know I could have handled it better.

Both times I tithed 10 percent.

The first time I bought a house and used 15k towards the purchase and another 10k towards upgrades to the house. I spent 5k on fun. I also spent 3k on a trip to Paris with my mom that turn out to be her final trip before she passed.

When my mother passed I received approximately 25k. But I also ended up with two mortgages. I'm embarrassed to say that I spent over 10k on a car! stupid.

If it happened again, I would fund my emergency fund 20k and take at least 10k to work on our house. I would give 5k to my church.

I will say that waiting on spending the money is a very smart suggestion.

[Jennifer]

I've never received a windfall. If I did get $50,000 I'd probably save about $30,000 to buy a new minivan in a few years. We currently have 3 cars and the newest is about 10 years old. They are all paid off and in good working condition for the time being, but eventually will need to be replaced. I'd probably finish maxing out my husband and my Roth IRAs for another $5,000 and then put another $5,000 away for the 2010 Roths (we half fund our Roth right now so the other $5k would come from our monthly savings). The final $10k I'd probably just save as I'm probably going to start my own business soon and it will give me a bigger cushion to fall back on.

[Old Limey]

Spivey:
I didn't even know that the Winter Olympics were being held in Vancouver. We're actually going on a tour of the Canadian Maritime provinces. It starts in Boston, then on to Maine, then by high speed catamaran to Nova Scotia, Halifax, Cape Breton Island, Prince Edward Island, New Brunswick, then to Bar Harbor, Maine for a lobsterfest, and then back to Boston.

[Old Limey]

FMF:
I have never been big on charity for people I don't know, and especially for religions. I believe in the old saying, "Charity begins at home" and consequently we send nice Christmas hampers to some of our less fortunate relatives back home.

[mashford]

Kids college fund or invest your own education ... charge up you earning potential for the best returns

[Noadi]

Old Limey: I'm an atheist and I give to charities, they aren't all religious by any means. I regularly donate to education related charities and because I can't give blood due to a minor medical condition I donate money to the Red Cross instead. People give for different reasons and it's a personal decision as long as you can afford to do so.

If I came into $50k I'd probably pay off all my student loans if I still had any (hoping to finish paying them all off in the next 2 years). Save some of it, donate some, and use the remaining money to put a good sized down payment on a nice little house.

[Concojones]

@Old Limey: I can relate to your ideas about charity to some extent. Personally, I would never (*) give to large, 'anonymous' organizations, only to real people in need (however, including strangers). By the way, I believe more in giving time, advice, a helping hand, than money (I will give money if it's what's needed; I just mean that money is seldom the root problem).

(*) OK, never say never. I am in fact considering to give to Greenpeace, but am still in doubt as it's against my principle outlined above.

[LotharBot]

A windfall of 50k right now? It'd go into a money market fund to be used on a house in the near future.

[billyjobob]

Just a short note on charities. I agree that there are way too many charities that are not worth giving too. Often the money is spent on people that don't need it. But, two that are safe ( I mean your money will hepl people in need). The United Way and Salvation Army. With those most of your dollars will go to really help the needy. I too am not interested in donating to build a new church or that sort of thing.

[FMF]

Old Limey --

What Noadi said. Look at Bill Gates -- wealthy, gives away a ton, does not give to religious causes (as far as I know). There are lots of "non-religious" charities that a wealthy person can support that go a long way towards helping people eat, finding cures for disease, and providing educational opportunities. You may want to check them out.

What blows my mind the most is that someone who seems to be very kind, compassionate, and willing to share with and help others (at least in this forum) and who is also quite wealthy, wouldn't give away even part of a $50k windfall. That's chicken feed money to you, and yet you wouldn't give some away. Your response just surprised me and was one I never would have guessed would come from you.

[Eugene Krabs]

I don't speak for others, but on the subject of charity, Warren Buffett was asked for years why, despite being a multi-billionaire, he never considered donating to charity.

His response was that he had a charitable foundation set up for his late wife, and that she was the one who handled charity work. It was her passion. Unfortunately, she passed away early, and Warren being Warren patiently searched for a suitable replacement.

When asked why not just a few million here or there anyways, he basic response was that even charity money should be invested wisely. Otherwise, that few million here or there, which is enough to change the lives of many, would still be squandered to no effect.

Plus, a few million here and there also represent a risk in the loss of opportunity money, because under his care, they could grow to perhaps many more millions that can provide an even greater impact for a lot more people. If he paid it out too early, then that would not possible.

In the end, he settled upon letting the Bill and Melinda Gates Foundation to handle it.

[FMF]

Eugene --

Here are my thoughts on your thoughts:

1. Warren Buffett is a notorious skinflint. Read the latest book about him (can't remember what it's called -- I believe it's white) and you'll get a sense of how he has an unhealthy relationship with money -- he doesn't control it, it controls him. Many (most?) of the personal relationships in his life were ruined by his obsession over money. He's not one to hold up as an example of how to mange your money (IMO). How to invest your money -- he's unsurpassed. How to manage your money -- he's among the worst examples possible I can imagine.

2. This said, even he eventually became old, decided he wanted to do good and had enough, and gave his money away. This is the position (older and has a ton of money) the commenter above is in, and why I noted it.

3. In general, I think the "I can grow it so I can give more" line of thinking is a cop-out. You can also lose it pretty quickly trying to earn more (as we've all learned the past couple of years.) You might be interested in this post that goes into more detail on this thinking: http://manvsdebt.com/excuse-not-to-give/

Hmmm. Maybe I need to write a post about this...

[Eugene Krabs]

Perhaps I've hit a nerve here. Didn't read the entire thread word for word.

Yes, Warren has had what many feel is an unhealthy relationship with money. And his past relationships suffered because of it. I agree that aspect of him is not worth following.

That said, and with the utmost due respect, I must disagree that he is copping out. I think his reasoning, listed in my previous comment, is indeed quite reasonable.

And in the end, regardless of the rhyme or reason, he is still donating a massive amount towards charity. If he had intended to somehow keep it somehow, then that would have been a different story.

[FMF]

Eugene --

To be a bit more clear, the logic is a cop-out IMO unless you can almost guarantee a great result/performance year after year. Buffett can now do that in hindsight, but couldn't while he was in the midst of doing it. To me, it's an excuse -- he didn't want to give so he had to come up with a reason why it was a bad idea to make himself feel better. Then when he got older and started to realize the error of his ways, he gave it away.

That's for Buffett specifically. Most people are no where near the investor he is (I think we can agree on that). Given this, the "wait until I have more" reasoning is a moot point for all but a very select few.

One way to think about it: people are dying NOW -- of hunger, disease, and so on. Do you think it's wise to wait 20 or 30 years to give? Sure, there may be more money available, but think of all the death, the lost opportunity (those diseases could have been cured!), etc. if we were to all think this way and act upon it. If you want more of this line of thinking, see the Man vs. Debt link I provided above. It's good food for thought IMO.

Not sure if it's a nerve for me or not, but I was certainly shocked/surprised by the comments above. Someone who has millions and doesn't give (at least not outside the friends/family circle) seems so contrary to the personality I had associated with the commenter. Maybe I should just keep quiet and stop asking people questions about their comments. ;-)

[Crystal]

FMF, I would rather you continue to ask questions...IMO a blog is better when the poster is involved. Old Limey's wife is the "giver" in their relationship, but she doesn't use the computer, so we will never know how much she'd sneak away (huge wink to Old Limey).

I'm the "giver" in my relationship...my husband knows when I donate, but he doesn't donate himself very often.

[Eugene Krabs]

Ah, well, it's only the internet, and what better way to leverage it than to share our thoughts in the spirit towards better overall understanding eh?

You know, the thing about Warren is that you're most likely right. He really doesn't have any specific interest in charity work. His specific interest is in

fundamental investing.

But I don't think that actually translates to him not having any desire to donate to charity though... if that makes any sense. Like many who are actually in the

position to provide charity at such a large scale, they know that it requires quite a bit of brain power to create truly effective and sustainable solutions.

As you say, take the issue with world hunger... well, no, maybe that's too big. Let's just take one child in Somalia that we can feed right now. Let's say we donate

to the World Food Bank that promises to feed that child in Somalia. Now, that organization also has to figure out how to deliver the food to said child without

running into factional warlords that will most likely take the food by force, feed his own troops instead, and sell the rest to the black market for more arms, still

leaving the child to starve to death. To solve that, perhaps Peacekeepers and some asymmetric warfare is required. Convoy escorts and even shaky

alliances with certain iffy warlords. Pretty soon, you're attempting to solve the entire infrastructure of Somalia.

And that's why Warren's always left the charity work to someone whom he trusted and knew was dedicated towards the work, because it doesn't help anyone to

just throw good money blindly at anything, including charities. Now, maybe he is rationalizing for all I know, but then, he does delegate company operations to

the company boards, so that's why I do not believe that he is specifically two-faced regarding charity work.

Finally, with the article written in Man vs Debt, my personal feeling on the matter is that it isn't necessarily a slippery slope. I mean, it could be for some, but I

don't think it is for most because you basically know deep in your heart if you're going to give to charity or not. It's just a matter of worrying about how the world

will perceive you, and therefore, developing rationalizations to cover that fact.

Personally, I'm just another Joe Blow out there. Not even close to my first million. Yet. Just the same, I don't give to most charities. But I don't because I treat it

like any other investments that I make in life: If I don't understand it well enough, I don't put my money in. For example, the homeless people that you see on

intersections and highway ramps? Many of them are professionals who decide that preying on people's good will is better than sobering up and holding down

a job. I'm sure some are indeed decent people, but because I can't tell which is which, that's not when and where I give out my money.

Contrast that to a family I know online where the wife found out that she has pancreatic cancer. It's in the early stages, but that stuff is no joke. She wanted to take

her kids to this special summer camp to meet other kids who are going through the same or also have cancer, so they can better understand the diease, and

make friends with these other kids. The only thing stopping them was that money is extremely tight. The whole scenario made perfect sense to me. I'm

donating through a reputable charity organization, knowing exactly how that family will spend the money, I can imagine what a positive impact such a trip could

have for the family, and I don't have to worry about them losing the bus ticket to some corrupt 3rd world ethinic warlord.

So, I "invested" into their venture. I thought I did it anonymously, but she somehow managed to track me down to thank me, but that's beside the point. The point

is, not all charities are above board, and those that are, not all have a transparent or even decent solution. Now, I don't know what the exactly situation is for

Warren or Old Limey, but that's at least why I, an average Joe, don't do most charities. And I think I can understand if others, particularly those with much bigger

balance at stake, take their time on it.

Or, I could be rationalizing as well. I'm open to that.

[Crystal]

Eugene, that's exactly why I donate my time more than anything else. I know they need my time and I know what I'm accomplishing as well. I also foster pugs since they need foster homes and I know exactly who adopts them from my house (I even keep up with them on Facebook). :-)

[Mike Hunt]

I never got a windfall that I didn't have to work for myself.

That said, with $50K I'd just bank it and not do anything.

For charity I believe in individual giving or doling out windfalls to people who I work or interact with, often anonymously.

I don't believe in giving to organized charity just like I'm not fond of feeding our overinflated government but do so under threat of punishment.

I think people can 'donate' in different ways and it shouldn't be that much of a shocker that Old Limey banked the $50K - not everybody follows a set percentage for tithing.

-Mike

[FMF]

Eugene --

It's a surprise to me when I hear of a wealthy person that's not a giver because:

1. All the wealthy people I know are givers.

2. I think giving breaks the hold money has on many people and thus opens them up to actually doing better financially.

3. I believe there's a "karma"/"law of the universe" principle that you get back what you give. Give love, get love. Give friendship, get friendship. Give money, get money.