How to Deal With a Small Financial Windfall

Here's how to make the most of your holiday bonus.

How to Deal With a Small Financial Windfall

You’ve probably noticed that pretty much all money advice deals with bad financial news. Which may explain why, when we do occasionally happen upon a small financial windfall, we have no idea what to do with it and generally end up throwing it away.

Curious what the smart move is when you come into a couple grand or so, I put the question to Brad Hart, a man who who runs the “Abundance Building” company Make More Marbles, and who is easily the least-stressed person I’ve ever met, despite working 70 hours a week. This is what he recommends for various modestly-sized windfalls, all aimed at the following, average(ish) consumer: A 30something person who is single, living paycheck-to-paycheck, renting their home and dealing with at least $3,000 credit card debt and $5,000 in student loans.

A $1,000 Settlement

The Strategy:

  • $100 for a fun night out
  • $900 into savings

The Reasoning: “Everybody needs three to six months of living expenses in cash in the bank,” says Hart. He adds that you should start there and make a consistent habit of saving 10 percent of everything. “First, you have to invest in your own peace of mind, then you can invest in your earning power,” he explains. With such an emergency fund tucked away — and, of course, this $900 is just a start — you can worry less about what to do if you lose your job or your health and focus instead on the future.

To help you start that rainy-day fund, I also personally recommend spare-change investment companies such as Acorns. I earned 10.62 percent return with mine, which earned me $139.41 for doing absolutely nothing.

A $5,000 Inheritance

The Strategy:

  • $500 to have some fun
  • $1,000 to the credit card debt
  • $900 in self investment
  • $2,400 toward life insurance

The Reasoning: “Now you’re ready to start thinking of a spending plan — not a budget, because budgets bring to mind the idea of scarcity,” says Hart. Knock the credit card down $1,000, then make a plan to pay it off at 10 percent per month. Instead of living paycheck-to-paycheck to make a $300 payment, you now can do $200, then eventually $100, $10, etc. When it’s paid off completely, you can put that $3,600 per year toward financial security.

Meanwhile, go blow $500 on a fun weekend so you don’t feel like it’s an endless cycle of scrimping and saving. Hart also recommends putting aside $900 for wealth education books and courses. Remember that spending plan I mentioned? This is how you get one that works.

With the last $2,400, you’re ready to be the only millennial with life insurance — the least sexy thing in the world, admittedly. But: “I’ve studied 500 asset classes for over 10 years and only just now have I realized what a good deal this is,” says Hart. “A $250,000 policy is about $200 a month. It accumulates cash value and down the line it’s as simple as filling out a form — in two days, you get a check. You could pay off a year in advance for $2,400.” Even if you borrow against the entire thing and don’t pay it back and then die: You won’t care! You’ll be dead!

A $10,000 Bonus

The Strategy:

  • $1,000 to have some fun
  • $3,000 pay off credit card
  • $2,500 cut the student loan in half
  • $3,500 to invest in your future

The Reasoning: First, wave goodbye to your regular $300 credit card payment, and halve your student liability (but keep using it to build your credit score with regular payments). “Now you should be focused on how to earn more money,” says Hart, in regards to the remaining $3,500 that you didn’t treat yo self with. “Learn about sales and marketing and become your own boss. You can even play around with crypto currency, since you won’t ever have to worry about feeding yourself if it goes bust.”

If that doesn’t sound like the right advice path for you, consider this alternative from Mr. Money Mustache, who has great advice for investing that last $3,500 in a low-cost index fund. He describes this as becoming a “lazy landlord” by buying shares in rental real estate rather than endure the headache of actually buying, renting and maintaining a property.

Either way, try to remember these words of advice from Hart, who believes it’s more often than not the good financial news that gets us into trouble: “You have a financial thermostat whether you know it or not. You know you get stressed when your financial temperature is low. You need to learn to raise your levels of financial comfort — that way when it gets too high, you won’t sabotage yourself until you get back to a comfortable level.”

In other words, have a plan in case you do come into some money, or you’ll end up feeling worse than before you got it.