Buzz
Whether you've landed a major client or hit the jackpot with the lottery, a surprise cash inflow is always a welcome event. However, it requires careful planning. Here's my take on the most effective ways to allocate that unexpected money, step by step:
Direct the largest portion of the windfall toward your most pressing financial goal
A windfall can help propel you closer to a major financial target. Whether it’s paying off debt, saving for a down payment, or budgeting for a global adventure, make the most of this extra money by using it as a shortcut to your goal.
If you don't currently have financial goals, consider setting some of the windfall aside in a savings account, money market account, or brokerage account. This way, you’ll have that extra cushion available whenever you need it.
Allocate a portion of the money into savings or investment opportunities
Refer to the previous point. (And yes, I highly recommend investing even if you’re hesitant due to market fluctuations.)
Treat yourself to a small portion of the money for something enjoyable
While putting all your extra funds towards student loans might be the smartest financial decision, dumping your entire windfall into debt can leave you feeling like you’re watching opportunities float away, as if you were standing at the edge of a pit.
Consider allocating a portion of that money—the Financial Samurai recommends 10 percent—toward something you’ve always dreamed of.
Make sure to spend at least some of the money on someone else
Whether it’s donating to charity, supporting your local library, or treating your parents to a meal, ensure that a portion of that extra money goes to someone other than yourself. Many people helped you get to where you are now, and now it’s your turn to give back and pay it forward.
Think about purchasing more time for yourself
You might remember that study from a few years ago that claimed the best way to turn money into happiness was to buy back your time. Consider using part of your windfall to outsource tasks you dislike, whether it’s grocery shopping, cleaning your house, or doing laundry.
Alternatively, if your windfall is significant, consider using it to move to a house or apartment that’s closer to the places you frequent (or the places you would visit more often if they weren’t so far away). Long commutes can be one of the biggest time drains, so see if you can use your extra funds to cut down on or eliminate that time spent traveling.
If you’re a freelancer or have a side hustle, invest in your business
If your additional cash comes from a side hustle or freelance work, it’s wise to reinvest a portion of it back into your business. After all, a business requires either debt or capital to grow, and capital is the smarter choice. Consider upgrading your equipment, investing in marketing, attending conferences, and using those enhanced tools and skills to secure your next big client.
The Freelancers’ Union offers some further ideas on what to do during the “feast” phase of a feast-or-famine cycle:
What high-interest debt could you pay off?
If you need a substantial operational boost, what affordable lines of credit could you tap into?
You’ve been
setting aside money for taxes
...right? Now’s the time to catch up on that.
What business investments would give you the highest return on your money?
I also suggest putting as much of that extra cash as you can into a retirement account that will provide you with an above-the-line tax deduction (such as a traditional IRA or a SEP IRA). No one wants to pay more freelance taxes than they need to, right?
Lastly, be sure to set aside some of that money to help cover you during the next slow period.
Avoid lifestyle inflation... or welcome it
As a financial writer, I feel compelled to warn you about the peril of lifestyle creep. Once you enhance some part of your life, whether it’s updating your wardrobe or moving into a place with in-unit laundry, you’ll find it hard to go back to life without that upgrade.
Sure, there's merit to being mindful about your spending. But there's also value in improving whatever parts of your life are lacking. In-unit laundry is a vast improvement over coin-operated machines, and once you move into that new place, buy those better-quality clothes, or dine at that restaurant you’ve always wanted to try, you'll have the experience, the clothes, or the memories—and those things should stick with you, at least for a while. (If it’s a durable, timeless outfit and you’re not constantly tossing it into a public washer, it could last you a decade.)
And yes, this high-earning period could be fleeting. So, make sure to set aside what you need and pay off any debts that require attention.
Then, use your extra money to enjoy life and improve the lives of those around you.
