So, you’ve recently received a bonus/some sort of cash influx. It could be in the form of a tax return or lottery winnings or even a gift from a family member.
You’re trying to be smart about how you handle this new financial shift, especially when you consider that an unexpected cash bonus, no matter what the amount, can lead to reckless spending habits. According to Forbes Magazine, “Lottery winners tend to file for bankruptcy at double the rate of the general population. A Sports Illustrated investigation found that 78% of NFL players file for bankruptcy or experience financial difficulties within two years of retirement. 70% of families lost control of their assets in the first generation following wealth transfer.“ Fortunately, with a bit of planning, you can avoid this pitfall when you get your windfall.
If you decide to spend some of your newfound money, then this becomes the ultimate question: do you spend it all at once or reward yourself in smaller increments throughout the year? This decision usually boils down to personal preference, but there are pros and cons to each to consider before you decide where you want to spend your bonus.
Spend it all:
Some ideas for a “Spend It All” reward include
- taking a vacation
- a down payment on a new vehicle or home
- remodel/home improvement
- buying a consumer item like an expensive piece of jewelry
- professional development (getting that certification you’ve always wanted)
- invest in an investment vehicle that earns interest, like mutual funds or even a CD
Spending your reward all in one place has a few benefits. First, this means your reward budget is larger, so you can buy a higher quality reward. This means you could, say, do the entire bathroom remodel versus having to do it in stages or wait to save up the full amount. (Also some expenses, like taking that class, can be tax deductible if you can write it off as a business expense. Talk to a financial professional before you decide what is tax deductible.)
The downside: If you decide to go this route, there may be hidden costs that you haven’t accounted for in your reward. For example, before you book those plane tickets, make sure you’re accounting for things like lodging, travel, food, etc. For an upgraded car, consider things like a change in auto insurance. Keep these hidden additional costs in mind as you plan your big splurge, otherwise you might end up contending with something that affects your everyday budget, and becomes more of a punishment than a reward.
Spreading it Out:
Some ideas for ‘Spreading It Out’ include
- debt payments (additional money on your mortgage, credit card debt, etc.)
- putting more towards your retirement
- funding your kids’ 529 plan
- monthly fancy dinners out
- regular donations to your favorite charity
Smaller rewards not only allow you to ‘treat yourself’ more frequently, they can help keep you in-check as well. For instance, some people who completely cut out sweet foods from their diet for an extended period of time will overindulge the next time they try to eat something with a bit of sugar. The financial equivalent is called “frugality fatigue” by LearnVest. The “a little bit here and there” model tries to eliminate that potential backlash from the all or nothing mindset.
As you see, you can treat yourself whether you spend it all or spread it out. The key is having your sudden windfall fit into your plan and not be something that disappears without a trace.