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From The Budget Coach
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-- Planning Ahead for Your Windfall
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From The Budget Coach
Welcome to my "Common Cents Budgeting Tips" Newsletter.
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Many of the new sections that were added to The Budget Kit workbook over the various revisions these last many years, came from insightful readers and clients like you who wanted to help make a difference.
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Have a fulfilling and prosperous day!
To Your Success,
Tips & Information
Planning Ahead for Your Windfall
The Internal Revenue Service is expected to be issuing tax refund checks for over $200 billion this year.
Have you received your tax refund yet?
Do you have an itemized plan for how you will allocate these funds?
Did you spend the whole refund before it actually arrived?
By now you have probably read and heard enough commentary from all the media stressing why it’s better NOT to receive a tax refund. As you know, you are essentially offering a generous interest-free loan to Uncle Sam during the year. But tell that to the 100 million Americans who are looking forward to receiving their tax refunds, especially with refunds averaging $2200-2300 according to the IRS.
Since this forced savings technique is well ingrained for so many people, I decided my best approach is to give my standard recommendation of having a strong proactive plan for managing any windfall.
Whether your windfall is coming from a tax refund, insurance settlement, inheritance, royalties, family cash gifts or company bonus, (okay – or the lottery jackpot), having a crystal clear plan will help you hang on to a lot more of that dough. Having a specific plan will also prevent you from falling into those usual temptations - spending the money before you actually have it, or worse, spending two or three times the amount you actually receive, just because you slipped into that crazy thinking that you now have “a lot of money”.
Different Strategies for Windfall Planning
Past – Present - Future
Some people like to divide up the money and put equal portions towards the past, present and the future. This gives them a sense of balance and peace of mind. You may choose to use a different percentage or dollar amount for each section. The whole point is to start planning ahead of time before the money arrives.
- Past - Pay off past debts, at least the most expensive debts
- Present - Buy or do something on your wish list to experience some satisfaction
- Future - Set aside money for future needs or investments
Priority List
For some people there is something about a windfall that seems to turn off a portion of their rational brain. Suddenly they want to splurge and feel entitled to do so because of this extra money – as if the other financial issues no longer exist.
Before giving in to this urge and trotting off to Hawaii, or buying the new living room set or big plasma TV, be sure to review your whole current financial situation and prioritize your needs.
Read the following questions and determine how applicable and important they are in your household. If these situations apply and are important to you, this heightened awareness will help you get past the first impulsive urge to go out and splurge on whatever you happen to really want at the moment.
Consider the following questions:
- What is your current debt costing you in finance charges?
- How much debt and stress could you eliminate with this money?
- 49% of consumers will be applying their tax refund to paying bills according to an Experian - Gallup survey
- Do you have nagging back taxes to settle?
- Will this windfall be taxed, and if so do you know how much of it to put aside?
- Have you established an emergency fund yet?
- Guideline is still to have 6 months worth of take home pay set aside
- 31% of tax refund recipients are planning to put money into savings according to an Experian - Gallup survey
- Do you want to stock up on household or grocery or baby goods?
- Are there upcoming expenses to prepare for this year?
- Child’s graduation, a wedding, major vehicle repairs, home repairs
- What earmarked events or projects have you planned?
- A vacation, home remodeling project, signing up for college courses
- What item currently needs to be replaced, or will in the near future?
- Computer, furniture, appliances, glasses, vehicle or tires
- Is your child’s college fund started yet?
- Is your own retirement fund started yet?
- Have you hired an attorney to handle your living will or to update your documents for your estate planning yet?
- Do you have your basic IRA or other investments set up?
These are only sample questions, but questions to help you consider different ways to apply your windfall money. Sit down and make a list of these various categories and the amount of money you want to apply to each one.
And of course, you may be saying you want to have some fun. So yes, do decide what amount or percent makes sense to apply toward some “reward”. Then apply the balance of the money to those targeted areas you wrote down on your list.
If you have a copy of The Budget Kit, be sure to look on page 66 and use the “Windfall Planner”. This planner worksheet will help you outline a plan and prioritize the distribution of the windfall money either through dollars or percentages.
The real key is to be sure you apply your windfall money exactly where you want it to go and not get sidetracked by all the other temptations along the way. In the end, rather than wondering “where did it all go?” you will be able to point to what you accomplished, and feel that sense of pride and fulfillment.
Enjoy your windfall and feel proud of your choices!
Please let me know how you liked today’s information and feel free to share it with others.
Thank you so much for being part of my online “family”.
Have a very abundant and fulfilling 2005.
For more information, feel free to contact me at
judycents@moneytracker.com
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