Years ago, I was walking to a restaurant with a couple friends when I spotted a fifty-dollar bill on the ground. After making sure there wasn’t a distraught individual frantically searching for their missing cash, I pocketed the bill and quickly announced that dinner would be on me. I thought to myself, “I didn’t have to do anything to earn this money. Why not pick up tonight’s check?”
Looking back on the experience, I don’t regret treating myself and my friends to a “free” meal. What I find interesting though, is how differently I treated that money than I normally would. Because I didn’t need to work or use any personal resources to obtain the fifty-dollar bill, it was completely disposable to me.
Money in and of itself has clearly defined value. That is to say, the value of money in the marketplace does not change based upon the nature or difficulty of the task performed to acquire the money.
$50 is worth $50, whether I found it, stole it, or worked hours to earn it.
Nevertheless, in this instance I wasn’t concerned with how wisely I spent that money because it didn’t take much effort to get it.
Easy Come, Easy Go: The Dollar on the Ground Mentality
I doubt that my decision to spend that fifty-dollar bill on dinner has had much of an impact on my current financial standing. But what if I applied the same “dollar on the ground” mentality to other financial decisions in my life?
I have a feeling the consequences could be far more significant.
Most of us don’t spend money like it grows on trees or lives on sidewalks, but there are times where we come across money either unexpectedly or with little effort and the ease of acquisition increases the ease with which we spend it.
Here are a few examples of financial windfalls that come to mind:
- You receive a $50k inheritance when a relative passes away unexpectedly.
- Your bank sends you a $500 check reimbursing you for three years’ worth of maintenance fees they should’ve never charged you for.
- You get a $300 credit card sign-up bonus.
- You and your spouse receive wedding gifts totaling $5,000 cash.
In each case, the energy, effort and resources expended are not commensurate with the dollar amount received.
A $50k inheritance just for being related to another person?! Who you’re related to, how much money they have, and whether they give any to you is mostly out of your control. Doesn’t feel much different than finding a fifty-dollar bill on the ground.
A huge refund check from your bank?! Sounds like a gift from the heavens. It’s either money you never even knew was gone. Or if you did know, it was money you probably never expected to see again.
Earning a credit card bonus might take a little more time and effort than I needed to reach down and grab that $50, but overall that’s easy money. Do a little research. Complete an application. Get approved. Meet some basic spending requirements. And boom, $300!
Whether you receive cash or not, wedding gifts are basically a windfall. Growing your relationship into marriage material took years of hard work, but surely you and your spouse wouldn’t consider wedding gifts as part of your compensation for those efforts, right?
Related: Check out this post from OthalaFehu about how he and his wife managed a $132k windfall after selling their home.
Managing a Financial Windfall
I usually treat my money like it took 50 hours of sitting in a cubicle to earn it – because that’s exactly the case. But I imagine that if I were in any of these situations, I’d be tempted to spend some or all of the money in a way I normally wouldn’t.
When we come upon money that did not require the requisite 50-hour work week, it becomes tempting to treat it like it’s entirely disposable. But a $50k inheritance can be a lifechanging amount of money if used wisely.
So how can we make sure we use it to change our life?
Here a few tips that can help you use the money wisely, instead of disposing of it at the nearest restaurant or shopping center.
Acknowledge the Temptation to Spend and Wait
One method you can use when you receive surprise money is to develop a system where you aren’t allowed to do anything with the funds for a specified amount of time. If you receive a few hundred dollars, for example, you might wait two weeks. If you received a few thousand dollars, you might wait four weeks. By intentionally delaying the fate of your surprise money, you give yourself time to consider the pros and cons of several options available for directing the funds.
This method is universally used with all types of applicability and has roots in Greek mythology. When Odysseus encountered the irresistible tones of the Sirens, he told his shipmates to plug their ears with wax and tie his body to the mast to ensure he was not tempted by the deadly enchantment that had been the downfall of numerous others. Odysseus recognized the probable pitfall he would face and made a plan to protect himself from it. My example might be a little dramatic, but you get the idea. Be sure you stop for a moment and think about how significant the situation can be for your life. That will give you a little more time to make the best decision.
Deposit Your Surprise Money into Accounts with the Rest of Your Money
This sounds simple, but integrating newly-inherited money with money you earned the old-fashioned way can quickly make your windfall indistinguishable and tougher to spend carelessly. The money will feel less disposable when blended with the rest of your money that you treat so carefully. Odds are, you already had a big-picture financial plan in place before this “easy money” entered your life. By integrating it with your other funds, you become more likely to use the funds to further your existing plan, instead of rushing out to buy a jet ski.
Earmark a Portion as “Fun Money”
Consider using a portion of your surprise wealth as “fun money” to increase your wealth. To be clear, when I say “fun money,” I mean it in the sense that you are buying an investment product that you might not normally include in your investment mix.
Many people don’t take enough risks in their portfolios, so why not use this “disposable” money in a way that can really benefit you? Although it may be perfectly reasonable to throw that extra cash at your mortgage, you’re likely securing just a 3% to 5% gain at best. An emerging markets mutual fund, on the other hand, may offer you upside in the 10% to 15% range.
A Few Final Thoughts
Coming into money is a blessing that seldom greets us. For that reason, you should really consider implementing some safeguards or strategies to make sure you make the most of the opportunity. Whether you want to treat yourself to a vacation, a special shopping trip, or pursue certain financial goals, it’s important to think through how you are going to use the opportunity. All in all, make sure you have a plan and use whatever monetary blessings come your way to enrich your life in as optimal a way as possible.