It isn’t often that money unexpectedly falls into my lap, but that’s pretty much what happened to me last week. Twice.

First, I collected $450 for finishing second in one of my fantasy baseball leagues. The entry fee was $175, so my net winnings equal $275.

My other “windfall” resulted from a minor traffic accident I was involved in back in June. Nothing serious. It was just some knucklehead who didn’t bother to secure a couple shelves on his trailer. Predictably, they spilled onto the highway and into my car. Nobody was hurt, but my car suffered nearly $1,700 in damages.

After the other driver ignored his insurance provider’s phone calls for several months, they denied my claim. (Who knew that you could get off the hook for an accident by burying your head in the sand and ignoring calls from your insurance provider?!)

That meant the $500 deductible to get my vehicle repaired would be coming out of my pocket.

Side Note: I am partially to blame for my situation. Thinking the other driver just made a silly mistake, I tried to be a nice guy and didn’t call the police or ask for a written statement. That was a mistake. Don’t be a nice guy (or gal). Get a police report, a written statement, or a recorded admission of liability. I learned my lesson the hard way.

best use for a financial windfall

Lawyers everywhere are shaking their heads, wondering if I was playing hooky on the day of the “get it in writing” lecture.

I ended up reaching into my emergency fund to pay the $500 deductible. My insurance company basically told me that they were going to close the file on the matter, which was their way of saying “Don’t expect to get reimbursed for that $500.”

I assumed I would never see that money again. But I wasn’t going down without a fight. I drafted a demand letter threatening to take legal action against the other driver.

Apparently, it worked. Four months after the incident, I was finally reimbursed for the $500 deductible.

So now I have $950 sitting in my checking account that I wasn’t expecting just a couple weeks ago. No, it’s nowhere near a life-changing amount of money. But it’s nothing to sneeze at either…

Managing a Financial Windfall

As I think about how to use the money, I keep coming back to two basic approaches.

On the one hand, I can look at the money like it’s $950 that just fell into my lap. When I do that it seems like the way I use it is irrelevant. Like I can’t go wrong. If I use it responsibly, good for me! If not, that’s okay too. Either way, I’m no worse off because I had no reason to expect the money would ever impact my life (or enter my bank account).

The second approach ignores whether I could reasonably expect to the receive money. Approach #2 instead focuses on how to make the most of the opportunity. Of course, making the most of the opportunity probably means something different for everyone.

I’ll come back to how I worked through these unique approaches in a moment. But first, let’s play a little game. It’s called “What would you do with an extra $950?” If you’ve ever daydreamed about what you’d do if you won the lottery, you know how to play. Except in this case, we’re talking about insurance proceeds and fantasy baseball winnings. And a LOT less money.

Anyway, take a second and ask yourself what you’d do with an extra $950.

In case your curious, here are some of the options I considered when the money hit my account.

1. Student Loans

Any time I have a little extra money, the first thing I think of is how big a dent it would put in my student loans. I graduated from law school a few years ago with $86k in student loans. I’ve put over $100k toward that debt, and would love to stop cutting checks to the Department of Education. (Just kidding. I refinanced my loans, so I’m not dealing with the Department of Education. Instead I’m transmitting funds every other week to a private lender.) With just a few thousand to go, it sure is tempting to throw another $950 at those loans and inch a little closer toward wiping out that debt.

2. Savings Goals

While my first inclination is to throw any spare cash at student loans, Plan B usually involves putting my extra cash toward savings and investments. My decision to attend law school also meant that I entered the workforce later than the average person. Thus, I’ve had fewer years of adult-level income, which in turn means less money to invest and save. Even though a law school degree translates to higher earning potential, I feel like I have a lot of catching up to do. On top of that, I get a little more bummed out when I think about all the years I wasn’t taking full advantage of the magic of compounding interest. $950 might not make up for all the money I missed out on by not investing during law school, but it’s a start.

3. Emergency Fund

I’ve been in aggressive student loan pay-down mode for roughly four years now. As a result, I’ve been operating with a dangerously low emergency fund. Instead of the recommended 3 to 6 months’ worth of living expenses, I’m closer to three to four weeks. Yikes! The responsible thing to do would be to place at least $500 in my emergency fund. After all, that’s where it came from originally.

4. Gambling in Vegas

According to The Bogleheads’ Guide to Investing, “Most financial practitioners agree that well over 50 percent [of windfalls] are lost in a relatively short period of time.” As luck would have it, I’m heading to Vegas for a conference this weekend. And if the casinos have their way, I’ll lose my $500 windfall at a blackjack table in an astonishingly short period of time. Now, I don’t plan on trading all $950 for chips at the casino, but I’d be lying if I told you that using some of the money at the casino hasn’t crossed my mind.

5. Fun Money

I’m a minimalist at heart, so my Amazon Wish List is pretty short. But that doesn’t mean I don’t have a few things I’d like to do if I had a little extra money. Because I’ve been so conservative financially for the past few years, I try to at least consider using some of my extra money for something fun. If I don’t have anything I want to use it for immediately, I can easily put it in an account and continue saving up for a future fun money purchase.

It’s All About Perspective

Let’s revisit those two approaches we briefly discussed earlier. After reading the list I made for ways to use the money, you can probably guess which approach I usually take.

While I can certainly understand why someone might decide there’s no wrong way for them to spend a financial windfall, I have a hard time thinking that way. I feel guilty having any type of outstanding debt or obligations hanging over my head. Heck, if somebody gives me a piece of gum I immediately feel the need to somehow repay them. With that said, you can probably imagine how I feel about having lingering student loan debt. I definitely gravitate toward Approach #2.

Here’s how I went about deciding what to do with the $950:

Let’s start with the $500 I received from my insurance company.

I couldn’t come up with a good reason for treating the $500 any differently than the rest of my hard-earned money. It’s not like the money I used to pay my $500 deductible just fell from the sky. I worked hard to earn it.

I thought of it like this: If the accident hadn’t occurred, there wouldn’t have been a deductible to pay. The money never would have left my bank account, which means it never would have returned to me disguised as unexpected money. In fact, the money would have remained in my emergency fund. So that’s where I put it – back in my emergency fund. For me, that was an easy decision.

What about the $450 in fantasy baseball winnings? 

I look at the $450 a little bit differently than the insurance proceeds. Unlike the insurance money, it wasn’t money that I worked for in the traditional sense. Sure, if I calculated my hourly rate based on the time spent thinking about my fantasy baseball team, I probably made $0.34 an hour. But I play for fun, so I don’t look at my winnings that way.

Back when I joined the league, the $175 entry fee came from my fun money budget category. I risked the money knowing I might not see it again. Fortunately, I had a good season and my fun money spawned fun money babies – 275 of them. For that reason, I was able to rationalize treating the entire $450 as fun money.

For starters, I plan on participating in the league again next year so I’m earmarking $175 for next season’s entry fee.

That leaves $275.

I thought my weekend Vegas trip for work was a perfect opportunity to put my fun money to use. Using the $275, I was able to pay for a flight for my girlfriend, cover a couple meals, and have enough left over in case I felt like gambling.

[NOTE: I allowed myself $20 for gambling and came back with $18.95. I suppose it’s a small victory to lose just $1.05. Plus, I discovered that gambling doesn’t appeal to me at all. So this may have been the last time I lose any money at a casino.]

A Few Final Thoughts

As I mentioned earlier, what it means to make the most of an opportunity varies from one person to the next. Personally, I rarely partake in “fun money” activities. That’s why I thought it made sense to use the insurance money to rebuild my emergency fund and use the rest for something different. Sure, I could’ve thrown the money at my student loans or into an investment account. But I know that’s exactly what I’ll do with my next paycheck and any extra money I come across. Sometimes I need to find reasons to spend money on having fun. This seemed like the right opportunity to do just that.

For others, however, it might be just the opposite. Maybe it’s rare that they use extra cash to build financial security. A financial windfall might provide the perfect opportunity to try something different by using it to save, invest, or pay down debt.

Everyone is different. That’s why they say personal finance is personal.

So, do you disagree with how I handled the money? What would you have done differently? What if you had an extra $950 of your own? How would you use it? Let us know in the comments below!

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