Tuesday, October 14, 2008

Unexpected money - what do you do with it?

What do you do with unexpected money?  Every once in a while, most of us end up with small or large amounts of money that we did not expect.  It can be from a bonus at work, a tax refund, a gift, an inheritance, or something else.  My wife's Great Uncle passed away, and we recently learned that she will inherit about $4,600 from his estate.  We certainly had not expected to receive a generous gift like this.

While you might not receive unexpected cash infusions very often, I believe that how you choose to use them can have a big impact on your overall financial situation.  Although everyone's financial situation is different, this is how I would prioritize the use of any windfall:

1. Establishment of emergency funds.  If you are living paycheck to paycheck and have no savings cushion, this is a great time to create one.
2. Debt repayment.  Knocking off debt ahead of schedule is always a good idea.
3. Charitable giving.  Giving is important.   Even if you are not regularly supporting charities that are important to you when you receive some unexpected cash, it can be an easy time to start.  After all, you weren't counting on that money for anything else.
4. Retirement savings.  Are you behind the curve?  Catch up!
5. Other long term savings goals.  Use unexpected money to boost your savings for a down payment on a home, your kid's college expenses, your next car, or anything else that you are saving for.
6. Something fun for you and your family.  Take at least part of the money to buy something nice for or do something fun with your family. 

After looking over our finances we decide to us this gift for these purposes:

$500 - Give to charity.  We believe that giving is important and try to give at least 10% of our income to charity.
$800 - Furniture for Baby's room.  We needed some furniture for our new baby's room.  This is a purchase that we would have made anyway, but we might not have spent quite this much.
$500 - College fund for our daughter.  We don't have any debt other than our mortgages and we are doing well with our retirement savings.  However, we are not yet saving as much as we should be for our 8-month-old daughter's college expenses.
$1200 - Savings account.  One of the weakness in my own budget is that I tend to keep a pretty anemic savings account.  As money builds up in my savings I always feel that it could be put to better use in one of my investment accounts.  However, now that I have a child, I really want to work on building up that savings account balance.  When do kids need braces?
$1000 - Investment account.  This is a good time to invest.  We created this account so that at least some of our long term investments are not locked up in a retirement account.
$600 - Something fun.  We have not yet decided what to use this part for.  Possibly for photography classes for my wife--something she has always wanted to do.

We think that this allocation works very well for our situation.  How would you use an unexpected influx of cash?

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