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This is a guest post from Lakita Fane of Personal Finance Journey, a website that offers encouragement, education and advice to those on the road to financial freedom.
What Would You Do If You Were Anticipating a Financial Windfall?
Depending on the circumstances surrounding the payment, emotions could be high. To prevent making moves you'll later regret, it is important to put a plan in action. This is the situation my husband and I recently found ourselves in. I was (finally) awarded a settlement from last year's motor vehicle accident (rear ended by a drunk driver while at a red light).
Here are the guidelines we followed to make sure we are making smart decisions:
1. We wrote down a plan / budget.
Once we knew how much we were going to receive, we made a budget based on that amount. We pledged not to spend a dollar (or cash the check for that matter) until we wrote down everything we wanted to do.
Together we created a “wish list” and prioritized items accordingly. We also made sure we were balanced by allotting finances to various categories: debts, savings, giving / charity, and finally spending.
2. We pledged not to spend money until it is “in the bank”.
When anticipating a large sum of money (this is even applicable that are waiting on tax returns), it is never a good idea to spend money until it is in your possession. It may be tempting to start shopping around and the allure of deals and sales will be stronger than ever.
The truth is items will always go back on sale and there will always be another deal. The reality is anything can happen to delay your anticipated funds. Under no circumstances should you use credit or make purchases you otherwise would not be able to afford without the additional funds!
3. We keep each other accountable.
It's important to exercise discipline! While it is OK to splurge — don't go overboard. Exercise discipline and do not allow yourself to drain your additional finances because of lifestyle inflation. Refer back to the written plan and make sure goals are being met.
4. We pledged to give.
There is always someone less fortunate. We believe part of Godly financial stewardship involves giving so we plan on sowing a portion of our increase.
5. We Communicate
Communication is encompassed in all the steps above. We continue to express concerns, ideas and adjustments. As the original plan evolves, we discuss the pros/cons of any adjustments and come to a mutual decision.
Here is a macro view of our spend plan:
1. Pay off all consumer debt
I am happy to report we have ZERO credit card debt! We contemplated paying off a small car loan but then we would be very limited by how may other things we can do. We're already on the fast track to have that paid off relatively soon.
2. Beef up emergency fund
We've reached the milestone of a 3-month fund. The next goal is a 6-month emergency fund!
3. Set aside a portion for donations
Since we bought a home last year, most of our spending is going towards home improvements we were already saving for and furnishings.
Thoughts on Using Discretionary Income
What about you? What would you do with a financial windfall? Have you ever been in such a position?
Photo Credit: linh.ngân