Regular readers know that I’m a big proponent of credit cards. I love them. The credit card companies don’t love me though. They don’t make any money off of me. Last year, I signed up for the Chase Freedom Rewards card because they offer cash back on every purchase you make. Fast food, grocery, and gas, is all 3% and everything else is 1%. Well I’m now eligible to withdraw some cash from the rewards account, $250 to be exact.
No this isn’t life changing, but I consider a windfall to be any money that I never budgeted for falling into my lap. I have $250 to spend, so what should I use it for?
In order to figure that out we must look at my current financial situation. I have a car loan that will be paid off this month. I’ve also got a loan on The Sheconomist’s engagement ring. Then I have an emergency fund, and savings account, both of which I’m trying to grow. I also have a Roth IRA that is being funded regularly. I already have the money saved to pay off the car, and the money for the engagement ring is just sitting around for 6 months getting interest. The Roth is going strong so I don’t feel a need to add to that for now either.
I am getting married next year and have a honeymoon to pay for. Getting married will add a wife and dog to my financial considerations, meaning I need to raise my emergency fund. I believe each person must set their own limits on what your emergency fund should encompass. For me it should be 3 months of expenses, per person (meaning 6 months for me and The Sheconomist), and then 25% of that amount for each pet. My four-legged friend has already been through a lot this year, with some expensive surgeries. He even died on the table but was revived. So from personal experience, it makes sense to have some money set aside for pets.
Now I don’t expect the three of us to all need the fund at once, but this is the basis of my formula. So we can put some numbers behind it, let’s say 3 months of expenses is $5,000. So I need to have $10,000 in emergency savings to cover the humans in the family. Throw in another $2,500 for the dog and I would need to grow my emergency fund to $12,500. Sounds like a lot, but it’s a small price to pay for peace of mind. I don’t have that much in my emergency fund, and my own calculations work out to be less than that, but I do need to grow my fund. The obvious choice then is to add $250 to my emergency fund.
WRONG
I said before I’m getting married. While its traditional for the father of the bride to pay for the wedding, there are so many things to pay for, something might slip by that needs to be covered. I’d also be a terrible son-in-law not to offer to pay for something. And it is on me to pay for the honeymoon, officiant, and some other odds and ends. When you get to a few days before a wedding, and something needs to be paid quickly, its easy to whip out the credit card and swipe/move one. Only a month later will I realize I don’t have the cash to pay for it and then I’m in trouble. So most of my HUGE windfall is going into short-term savings to help pay for my responsibilities in the wedding.
But what about the emergency fund? You don’t want to get married and then laid off and have no money, you must add to the emergency fund. You’re right. I’ve added $50 to the fund. But also because I’ll have the car paid off this month I’ve adjusted my direct deposit to add a small percentage of each paycheck into my emergency fund. It won’t grow to my desired goal by next year, but it’s a start.
Everyone comes across money in some way/shape/form at some point in their lives. It could be an inheritance, gift, tax return, lost commission check, or bonus from work. We all manage to get a few hundred bucks or more that we never expected. You must figure out on your own how you should spend the money. My recommendation is to start with your debt. Knock out any card balances you have or late payments on other bills, then look at car loans or other low interest loans. The one possible exception is student loans, but only if your interest rate is VERY low. Only after you address these should you consider using the money to bolster savings or blowing it on something fun for you.
The exception to this rule is if you are coming into a few thousand bucks. If the windfall is larger than mine like that, consider setting aside 10% to spend on yourself. Money is meant to be enjoyed. Like liquor though, enjoy responsibly.
 By The Weakonomist |
The Weakonomist is the founder of Weakonomics. Clicking the picture of the puppy will tell you more about him. If you like what you're reading consider subscribing to the blog, following him on Twitter, and checking out the related posts below. Please consider a donation if you really enjoy Weakonomics. Also keep in mind that nothing I say can be construed as financial advice. |
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