Do You Spend Money You’ve Worked for Differently than a Windfall?

An interesting comment on a recent post caught my attention. In response to my suggestions for things to do with a tax refund, Ross wrote,

“Paying off any high interest debt will save you money in the long run, but it can be pretty tempting to buy something frivolous with the money, especially if you weren’t expecting it.

I feel completely different about the money that I’ve worked really hard for, than something like a refund that I wasn’t counting on. I really want to buy an Ipad, but i’m going to do my best to resist that urge.”

I can relate to Ross’ comment, and wondered if others shared our reservations to frivolously spend money we worked to earn, but feel more temptation to spend money we receive unexpectedly. Of course, one could make the argument that a tax refund is simply a return of money you have already earned and overpaid (assuming you paid taxes at all). In that sense, it is a little different than inheriting money or lottery winnings, etc.

Back to the original idea. Many times financial planning types suggest taking 10% of an inheritance received, or some other type of windfall, and doing something fun with the money. Take a vacation to visit a place you’ve always dreamed of seeing. Buy something of your heart’s desire, even if it isn’t very practical.

I generally think that is good advice, but only if you stop at 10% of the windfall amount. The problem is, many who find themselves on the receiving end of a windfall allow it to change their lifestyle. The expensive, once-in-a-lifetime luxury vacation becomes a once-a-year expense that eventually drains savings accounts and can lead to the accumulation of debt.

It also begs the question: Is it easier to spend money you didn’t have to work for? After all, when you apply a real hourly wage concept to your earnings, it may not be worth X amount of hours worked to pay for that trip to Tahiti.

There are some who would scoff at the very idea of spending any percentage of the money frivolously. I can understand that argument, too. After all, there are plenty of things most households could do with the money to better prepare themselves financially, such as.

In an effort to maintain some balance I would probably do a little of both. I would spend a small portion of the windfall on something I really wanted, but I would lean heavily towards investing the money into something that would continue to provide a return long into the future.

That might mean paying off any consumer debt I owed, or dropping some money into a few quality dividend stocks that would spin off income for years to come. Better yet, it might make sense to eliminate a chunk of our mortgage. That would be like getting an immediate 5% return on the money through saved interest.

One last option would be to do nothing. Just let the money sit in a money market account safely drawing a small amount of interest. We live in an era where people are encouraged to be doing something all the time with their money – actively investing it, monitoring it, counting it, etc. However, often the best move is to simply do nothing.


  1. I never really gave this topic much thought until recently. We are about to come into some windfalls this year and last year (to the tune of 25k) and we’ve been discussing what to do with it. We’re about to move across the country, so we’ll spend a little bit on new furniture and on food/etc for our upcoming (and overdue) honeymoon.

    But as for the rest – we’ll keep it in a high interest savings account for a year or two until we decide what to do. If we settle in nicely to our new city, we might use it towards a down payment on a townhome. If in a year it looks like we want to keep renting, we’ll use it to pay down our student loans.

    Are we handling it differently than our regular income? Not really. The bulk of our regular income goes toward bills, savings, and debt service (just student loans and one 0% car loan), and a little goes towards fun things like eating out or weekend trips. The only thing we wouldn’t have to consider with the windfall are regular bills (covered by our regular income). We count the furniture as a “fun thing” because we’ll be buying more expensive quality furniture to last the next 20+ years, rather than $50 craigslist finds.

  2. I’ve never received a windfall. I would hope that I’d do the responsible thing with the money and use it to further my current financial goals in life. It is hard to say how you would react, however, until you are put in that position. Fact is, for most of us, the windfall is probably not going to come. Expecting an inheritance, winning the lottery or a huge bonus only sets us up for disappointment. With that said, I think the most responsible thing you can do with any additional income is just to pretend you never got it. Live the same as you have been (as long as you are living within your means), and use the money for important goals that you were already working towards.

    If you don’t have any financial goals, then you are either a financial rockstar, or need to visit a financial professional, because things might just be out of control.

  3. We treat all “extra” money the same to make it easy, lol.

    Whether it’s taxes (and our whopping $13 refund…) or money from our hobby job, at the end of every month after we pay all of our bills and hit all of our savings targets, we divide any extra between the Emergency Fund/Savings account (25%), the Extra Cash for Investments account (35%), the Vacation account (20%), and our two individual Fun Money accounts (10% each).

    This just works for us and our zero-based budget. 🙂

    • Oh, and I guess I should add that we don’t have any debt other than the mortgage, which we do prepay quite a bit with cash from that “Extra Cash for Investments” account I mentioned above. It should be paid off in 10 years total or less (6 years to go). 🙂

  4. I think the only reason “they” recommend spending 10% is to scratch the itch to spend it all. 10% is better than all. That’s also presumably why “they” recommend spending part of your raises but putting most in savings.

    My wife and I don’t have any debt to pay off and we’re already maxing out pretty much every retirement/FSA/emergency fund/etc account we can get our hands on. When I get a tax refund (which I try to avoid, unsuccessfully…) or bonus I put it in savings. When I get a gift I spend it because that’s what the person who gave it to me probably wanted me to do.

  5. It is definitely easier to put money you didn’t earn in a different mental account than money you did.

    I have some inheritance money (mostly individual stocks) that I’ve never touched because I feel a bit guilty about it. When it loses money in the stock market because individual stocks go out of business, I’m perfectly happy to take that capital loss. If it were my own money, I’d have sold it and lumped it in with my own accounts a long time ago, maybe even put it towards our mortgage. It definitely wouldn’t be in individual stocks that could go out of business because I’m loss-averse.

    That situation is a little odd because of my own hang-ups, but I can easily understand how some people might want to use that kind of windfall money as fun money.

  6. I received an inheritance last fall of $25,000. To me, that’s no small sum. We put 10% to charity and the rest we are using to put toward a down payment for a house.

    We are treating it exactly as money earned. The inheritance is a huge blessing, but it’s just speeding us toward our goals — not sidetracking us off of them.

  7. We have savings and we pay more on the one credit card bill we have. When we do get a windfall or tax refund, it pays for college tuition. We have managed to pay 2 years of college, including books and misc. without taking any loans. I’d rather use the money on education than a trip to Disney. The trips are budgeted into our regular finances.

  8. I think that logically you should treat the extra money just like your normal income and use it according to your plan. However, I think there is a tendency to relax a little and have the “just this once” attitude that can eat through the extra money very quickly. A few years ago, we had two kids in braces at the same time. We finished both rounds of payments within a month of each other and had that feeling of relief that comes when those braces are paid off. Although it wasn’t intentional, I had a thought in my mind for a few months that we could afford to do extra things because we had extra money from the lack of payments. We went out to eat more and took the family to the movies a few times. Fortunately, once I got back on track and was keeping the budget updated, I saw the results of what we had been doing and changed my mindset very quickly!

  9. I think sometimes having the windfall gives you a “backup” or a sense of security that you might not have had before… and allows your mind to wrap itself around something more adventurous in your investment portfolio. Knowing I had something coming gave my mind the go-ahead to buy a 2nd small home and pay cash and turn my present home into a rental. (Out here homes are NOT expensive, both under $100,000. )

    Now it’s not that I spent the windfall that I didn’t have yet, but I did let loose of some of my other existing liquid investments and bought the house, knowing that it was a great opportunity and investment, and would make a beautiful peaceful home in the country. The rental in the city I will hold onto until such time as sales prices go back up, and it’s rented to a friend in the meantime.

    Meaning the future windfall gave a sense of security to do something with my existing funds that I already wanted to do. I did NOT go into debt – I only spent what I already could afford to do.

  10. I can’t comment on windfalls and spending but I can tell you that when I took an inheritance and paid off my debts, it really humbled me like nothing else. To know that someone I loved worked so hard for those dollars and it was being used to wipe out my debt load made be very grateful.

  11. I agree with some of the posters above.
    An inheritance often comes with an emotional attachment, where lotto winnings or ‘bonus’ earning may not.
    I think I might treat each differently because of the was in which they were received.

  12. The only “windfall” that my husband and I have ever received is our tax refund each year. In the past, we’ve treated it as fun money, and spent most of it frivolously. This year, however, we are on a written budget, and we have goals that we’re working toward (paying down debt, increasing savings, etc.), and we are using the money to go toward those goals. Since we had those goals in place, it wasn’t even tempting for us to splurge on something that we really don’t need.

  13. My husband came across some money recently that was meant for him when he turned 18. No one in the family knew about it and we found out about it when we got a letter from the IRS saying we didn’t report funds for 2009. It is a little like winning the lottery, because there is nothing emotional attached to it. My hubby’s grandfather started this account when he was a baby and I guess forgot about it. For now we are letting the money sit in the investments, because to us it is like having a nice emergency fund. It is a once in a lifetime opportunity and we don’t want to blow the money on frivolous things. Because we now have that money I am a little more relaxed with money and will be starting school this fall. If we didn’t have that backup money I would wait another 2 years until our current debt was completely paid off before heading back.

    As for tax returns, I always put money into an emergency fund and buy things we need. This year though, because of the many part time jobs we had in 2010 to keep us afloat, our return will be very small and will go towards purchasing new tires for the car.

  14. The only significant windfall I’ve ever received was an inheritance about six years ago. We used it to pay off credit card debt and towards a down payment on our first home. So basically, it accelerated the same goals we had before we received the inheritance. But I get the desire to spend it differently — our inheritance sparked more than one tropical vacation fantasy!

  15. Since my husband’s paycheck varies month by month, I always budget for less than we earn. This means I deal with tiny “windfalls” every month. Each is treated the same way: 15% to our Frivolous Account, 85% to our soonest savings goal. This is the only vacation/blow money that we have so I don’t mind it being higher than the “expert recommendation” of 10%.

    Of course if we ever got a large windfall (like an inheritance) we would probably put it all toward our goals. That would help lower my anxiety a whole lot.

  16. I feel like I have little windfalls all the time..a tax refund, or a reimbursement from my health or daycare spending account, a cash back on my credit card. There always seems to be times when things are getting a little tight (like after christmas) and I cash some of those things in.

    I guess I personally treat my windfalls ike mini-emergency funds.

  17. Tax return,if there is one, is used for house insurance. The bill and the taxes come about the same time.
    Real windfall- we put it in a side account and use it instead of savings when we go on trips.

  18. Sometimes we say that we treat it just the same but windfalls can come unexpectedly. When you already got your cash, man instincts is to buy what he wants or to satisfy himself by buying those gadgets that he craves because he has lots of money on hand. Only few realizes that he must invest it somewhere to secure their future.

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  19. In the past two years, my husband and I have paid off $126,000 worth of consumer and mortgage debt. At the same time, we’ve been able to max out our 401k and invest in a 529 for our toddler’s college education… all while I stay home to care for our family and home.

    We get a lot of questions as to how we do it and I tell people that one of the largest ways we’ve done it is to change the way we look at found money. Found money in our family is anything from a tax refund to a stock sale to a birthday present to profits from a trip the consignment store. As soon as that money hits our hot little hands, it is transferred to the appropriate account. If the money is for our son, into the 529. Otherwise, it’s applied toward debt.

    This has made a HUGE difference in our finances. But when I tell people this, they’re usually disappointed by how, well, boring it sounds. It means that gadget or vacation or new car they’re saving for can’t be purchased that much faster. But, hey, you can’t argue with the results.

  20. I definitely feel differently about “windfall” money though I wish I didn’t. Granted the only “windfall” money we ever get are bonuses and tax refunds but they typically go toward something that has needed to be done but was too expensive, such as replacing our furnace, paying for other home repairs, etc.

  21. Oh, and have you ever seen The Prudent Homemaker’s website? She has some interesting info on emergency food storage, pantry cooking, etc.

  22. My main problem is that I spend money as soon as it hits my back pocket, and that’s my problem in general! But yeah, I think there is some credence behind your belief — I got a tax rebate for about $2,500 last year, and that wasn’t really spent on anything useful, meaningful or even financially savvy; I think most of it ended up on a new games console and a new T.V.! Ooops.

  23. Great Article. I was recently giving a lot of thought to this same concept as I awaited the deposit of my tax return into my account. I decided the only way I wouldn’t fritter it away was to put it to good use right away. Thus I wrote down my most important goals (debt reduction, baby-related expenses, education, emergency funds) and spent the money towards those things immediately, leaving no time to fritter any way.

  24. I have come into a few windfalls in my life: an insurance payout, two inheritances, totally @ 600K. I just invested the money. I read somewhere what made the diff between the Rich and the Middle Class was that the Rich did not spend capital. I adopted this early on as my credo. I have never touched my Capital, I just allow it to grow. I get a bonus each year and it goes straight into the bank. I think to become “rich”, you have to enjoy accumulating assets, not being just a consumer where money burns the proverbial hole in your pocket. I enjoy depositing to my Fidelity account!