The best unexpected money story I know took place in the 90s. A limo driver delivered a beautiful woman to the airport, but noticed that she dropped her briefcase. He recovered it, but couldn't catch her before her flight left. In an attempt to do the right thing (and earn her favor), he and his best friend rode a moped to Aspen and tried to track her down.
When they accidentally busted the briefcase open they found that it was stuffed to the brim with cash. Naturally, they went on a spending spree. Makeovers, pastel suits, and a new Lamborghini - the important stuff. They carefully tracked their spending with IOU's, but were still almost killed by the people who were expecting the money back at the airport. The briefcase is eventually returned to its rightful owner. The limo driver didn't get the girl.
That, of course, was the plot of the 90s classic, Dumb and Dumber. Money, heartbreak, sophistication - the pinnacle of cinema.
So, what should you do in the event you get some unexpected cash? Whatever you do, make sure it adds value to your life, and that it doesn't belong to cliche 90s villains.
Unexpected or unguaranteed money
I define unexpected or unguaranteed cash as anything other than your known minimum income. Here are some examples of what I consider unexpected money / unguaranteed funds:
Unguaranteed bonuses
Stretch goal commissions
Gifts and prizes
Unexpected cash refunds
Self-employed side hustles and royalties
Inheritances
In my opinion there are two good uses of unexpected money: freedom and/or fun. Your budget should already include adequate savings strategies prior to the unplanned and unguaranteed inflow, so it's kind of a free pass! As long as you're in a decent financial position, that is.
When your financial position is inadequate
I consider a financial position to be inadequate if any of the following are true:
Credit card debt
Any debt with an interest rate over 7%
Cash savings less than 3 months of living expenses
Less than 1% of your home's market value in a home repair fund (if a homeowner)
Not contributing to tax-advantaged retirement account, or contributing less than the minimum to receive maximum employer matching contributions
Unemployed
If you get extra cash, and you're living in any one of those situations, that cash needs to help get you out of it. Sorry, no fun! But at least your new dough can help you towards freedom. Think of it this way: you have to pause and pull the thorns out of your feet if you want enjoy the rest of the journey. Keep your chin up, accept where you currently are, and appreciate the direction you're heading.
When your financial position is adequate
For your financial position to be considered adequate, all of the following should be true:
No credit card debt, and no debt with interest rates over 7%
Cash savings to cover at least 3 months of living expenses
Cash savings of at least 1% of home's market value in a home repair fund (if a homeowner)
Contributing to tax-advantaged retirement account and earning the full employer matching contribution (if applicable)
If you don't meet those minimum requirements, your financial position is inadequate and you need to fix the issues. But if you're free of toxic debt, have plenty of cash saved, and are properly funding your retirement plan...
WOOHOO! Do what you want!
How I like to use extra cash
My wife and I are fortunate to meet the "adequate financial position" criteria listed above, so we have some choice when we come across extra funds. Here are some examples of our priorities when we get unexpected cash.
We use our work bonuses for fun stuff like vacations and nice-to-have home projects. We also contribute to our travel fund and home fund each paycheck, because our bonus money isn't guaranteed. Like many who have worked through COVID and/or the The Great Recession, I recently lost a bonus despite meeting the performance metrics it was based on. Yuck. We were quite glad that we hadn't already spent that unguaranteed money!
When we get cash gifts for holidays we immediately put them in our travel and PFE funds. When I received my first COVID stimulus check, I gave it to a local charity to support their food bank. I was a little more freaked out by the time I got the second COVID check, so I swallowed my pride and put it into savings, just in case things kept getting weirder.
My royalty payments from Healthy Dough: Ingredients for the financial health you crave are currently reinvested to fund my different financial ed platforms (such as this website) but will eventually go to extra principal payments on our mortgage. We have a goal to pay off the house before our son starts college, and losing our biggest monthly expense sounds pretty neat. So, fingers crossed I sell lots of books and we pay off the house super early, an extra $4 at a time.
If my imaginary Great Aunt Gertie meets her doom but leaves us money in her will, we would likely put it straight to extra mortgage principal payments, college savings, and/or something fun - whatever we think ol' Gertie would have liked to see most. Fun and freedom, pals - that should appease her. (PS: don't daydream about how much you'll profit from the death of a loved one - that's gross. Remember, it's never too late to change a will, so don't be a jerk!).
As long as we're already investing plenty within our regular financial plan, I think we'll generally use most unexpected money toward paying off the home ASAP rather than adding more to our retirement funds. Expense reduction from early debt payoff is a guaranteed tax-free savings, and gets us closer to our primary goal of maximum flexibility.
Wrapping up
If you're already financially responsible and meet some dead presidents, who am I to say what you should do? Go on that dream trip, buy a kayak, put it in a blender with some spinach and make a treasury greens smoothie for all I care. Or, you could use it to get closer to a world with zero debt and more flexibility. Just remember to balance feeling good now (fun) and feeling good later (freedom). Financial health means that your money is a healthy and positive part of life.
So, what would you do if Great Aunt Gertie died and left you $20k? Let me know in the comments!
Your best life is a healthy life. Go get it.
Comments