How to spend a bonus or windfall

You got a bonus or a stimulus check. Celebrations may be in order depending on the amount and how it measures up to your overall financial picture.

There are some of us who will feel entitled towards it and without thinking much, will blow it away on some consumer goods, like a TV, watch or similar purchases.

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It could also be a relief to someone pressed under debt (credit card or personal loans) and would be wise to use it to pay off portion or the whole debt.

Getting debt free feels a lot exhilarating and this is one of the best ways to invest the money, if the person was really under crushing debt.

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Apart from the above two extremes, there is a third category where most of us will fall into. We have decently managed debt like a home mortgage and other investments and cash flow to sustain ourselves out of any crisis. We also do not suffer from the compulsive spender syndrome as the first category described in this post.

The question is then, how to make best use of the windfall or this lump sum of money?

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In this post, I will describe a methodology I typically follow to allocate my year end bonus or stock sale (company stock) proceeds.

  1. List the areas/goals of your finances which are hungry for money. Of course, there will be several goals that are not fully funded yet.
  2. Place the goals on a timeline, for example – buying a house next year, kids going to college in next two years or retirement 5 years away.
  3. Is your retirement account fully funded, like 401k maxed out?
  4. Did you aspire to acquire any particular investment, like an investment property or dividend stocks or even stocks of TESLA, AMAZON etc.?
  5. Do you lack any skill and may be you can take a course, which was expensive to sign up from normal paycheck or monthly budget?
  6. There could be several other goals, but the key is to list them all along with their timelines, the maximum stretch each can afford to go without being funded.
  7. Finally did you want to splurge on something like a new laptop, TV or other gadgets?

If you assign a timeline and importance (for example, maxing out 401k may be more prudent even though the goal is years away) to each goal, it will be easier to see where the money should go.

Here are some basic rules of allocation and it may differ from individual to individual. Normally I follow this priority and it has helped me absorb the money in a healthy way into my life.

  1. Invest a part in your growthI can buy courses, a good book or even sign up to a 1:1 coaching program. Be sure to research the topic and the training well, so that it fits well into your requirements, schedule and budget.
  2. Invest in your responsibilitiesInvest a part in kids’ education (529 plan), own 401k account if not maxed out, taxable accounts, fund towards buying a house etc.
  3. Invest in your lifestyleLifestyle does not mean spending foolishly on things you don’t need. Instead this category is to upgrade your present situation, may be even a little. For example, fix that broken window in your house or get that robot vacuum.
  4. Fulfill your wantsThe last part can be used to buy something that will give you joy, and not necessarily an intelligent purchase.

No matter what the amount is, you can spread it across the above 3-4 categories. These are not hard and fast rules, but in general following this allocation methodology will leave you satisfied about the way you invested and spent the money.

If you have any thoughts or opinions on how you would manage this good-to-have problem, let me know in the comments below.

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