Cash Windfalls

In Financial Peace University, Dave Ramsey discusses what to do with cash windfalls. A cash windfall is any amount of money that you receive that you didn’t expect to receive. He suggests that you plan for a windfall before it ever happens. As an example, if you get a cash bonus from your employer you should have already decided the allotment: 10% to tithe, 10% to savings, 10% for fun, and 70% to pay off debt. This way, you will never be left wondering where the money went.

I can’t tell you how many cash windfalls slipped through our fingers. Tax returns, bonuses, even refunds from school loans which we should have been putting back towards the loan, somehow, poof, they were gone. Of course, there was no “poof” to it. It was all about our irresponsibility, but it sure felt like “poof” at the time.

Even after taking Dave’s class, we thought we had everything under control. We were on a budget, we were paying our debt off, and we had pretty tight control on the money we spend. However, we really hadn’t kept our emergency fund as plump as we should have. We had funded it a couple of times, but the last time we used it, we didn’t make an attempt to refund it. And, can you believe it? An emergency happened! Go figure. Actually, two car emergencies happened. We hadn’t been saving long enough to have much of anything in our car repair fun so we had to dip into our tax return money. Before we knew it, it was gone. We had been hoping to use it to replace our flooring. I’m glad I waited to tear out the floor until we actually had the materials in the house.

So here we are again this year. Our emergency fund is low again because we just haven’t had time to build it back up. Our tax return should be pretty significant this year. What are we going to do with it? Here is the formula that we have devised to keep us honest with the money.

1. Bring emergency fund up to date. (Min $2000)
2. Purchase something off of our necessity list (curriculum for the kids next year is at the top -- we have a fund, but started it late and need a lump sum).
3. The rest will be put into our unemployment fund.

You might ask why we have an unemployment fund. If you have followed Dave Ramsey he says that baby step #3 is to save 3 - 6% of your income, however, in our experience, that is nearly as important as getting debt free. My husband has been laid off twice in the last 5 years. He is a computer tester/developer and now works in the health care industry. We are so worried about what the future holds for his company. We cannot loose another job with nothing in the bank. With the first job lay off we used every dollar of severance and every dollar of our 401K before he found another job. The last lay-off he had no severance because he was a contractor and unemployment wasn’t even enough to pay our mortgage. So, if this happens again, and it is like that it will at some point, we are going to be as prepared as we can be. We are still aggressively attacking the debt, but we made room for the unemployment fund all the same.

The floors will be waiting until there is enough in the housing fund, which at this rate…?

Take some time to talk with your spouse about how to allot your windfalls. Don’t leave it until the cash is calling you to spend it. Through the year we think of many items we think we “need” or at least we think we would like to have. By the time we get the windfall we have so many that we just lose sight of the end goal: to be debt free. If you are like us, create a list to keep with your budget. When you review your budget, decide which of them you should create a savings fund for, and which you should put on your wish list. Maybe more money into the debt snowball is the most important item on your budget. When those windfalls come, know exactly how much you need to put towards your funds and how much you can use for your wish list.

No matter what, keep in mind your end goal. If it is to be debt free, let that guide your decisions on how to use your windfall.