Windfall profits can be very exciting. This is an unexpected amount that you get outside of your regular income. It does not matter if the amount is big or small. What gets you excited is the fact that you have this extra money in your hands.
Investopedia.com defined this as a huge profit that is received unexpectedly because of an unforeseen circumstance. This term is typically used by companies and industries to refer to a sudden boost in their profits.
In this article, we will discuss it as a temporary spike in your income. It does not always come from your employer although bonuses and commissions are usually considered as part of this unexpected reward. It can also be from a lottery winning, inheritance or even a financial gift that is given to you. Any increase in your monthly cash inflow is considered as part of windfall profits.
But despite the obvious blessing that it brings, it also comes with a problem – how should you use it. Well this is one problem that we all want to have but then again, it still requires you to do some serious thinking.
You see, if you are one of those who think that the amount of money that you take home will make you rich, then you are most likely going to use this money the wrong way. This way of thinking will make you prone to spend it unnecessarily. What you have to realize is that becoming rich is not about how much money you get. Regardless of your financial situation, it is money management that can make your dreams come true.
3 mistakes after receiving a financial bonus
In some cases, mismanaged windfall profits can even lead to your financial demise. This is why you need to consider how you will use this to your advantage. While you may deserve to enjoy this money, you may want to think about whether you want to enjoy it now or will you do the smarter choice of prolonging it?
If you want to choose the latter so you can achieve a better debt-free lifestyle, then these are the 3 pitfalls that you may want to avoid.
Spending it all on present rewards
The first reaction of people who get that unexpected financial bonus is to spend it all on present rewards. It can be on an expensive vacation or shopping spree. We mentioned that you deserve to indulge – especially when this money is something that you worked hard for. But think about it, do you really want to spend it ALL on the present? Wouldn’t it be better to spend only a small portion of that today and then put it somewhere that will allow you to reap the rewards for a longer time? Prolonging would be a better choice because you will enjoy the benefits of the windfall profits for much longer. Take advantage of this amount to use it on something that will also take care of your future self.
Upgrading your lifestyle
Another pitfall that you may want to avoid is to upgrade your lifestyle based on that financial bonus. According to an article published on FoxBusiness.com, Americans spend the way they do because that is part of our culture. We think that people with fancy stuff like luxury cars, designer clothes, and big houses are important. This is the very mentality that destroyed us during the Great Recession. Do not be too quick to upgrade your lifestyle just because you feel like you became rich thanks to your sudden cash inflow. This is a very big mistake. As mentioned, this is usually just a temporary profit. The upgrade might not be something that you can sustain once the bonus you got is depleted. Your regular salary may find it hard to commit to the additional expenses that your upgrade requires. That could lead to a lot of debt.
Showing it off by buying junk
Admit it – most of the things that we buy are junk. By junk, we mean the purchases that will not mean anything in a few months time or a few years. That designer clothes that will make you look fashionable will no longer be trending after a season or two. That luxury car may look good but ii already lost some of its value as soon as you drove off with it. The gadgets and video games – all of these will just be accumulated junk in your home. If you do not need it, do not waste your windfall profits on it. And if you only want to buy them just to look flashy and important, then get over it. You are only setting yourself up for a long fall when your finances take a hit in the future.
7 steps to follow when you get a lump sum reward
When you get your hands on some unexpected finances, there are a couple of things that you need to do. We found 7 steps, as advised by Stacy Johnson in his website, MoneyTalksNews.com. You may want to check if these steps are applicable to you.
- Pretend nothing special happened. Basically, what he is saying here is that your first step is to pretend that nothing important happened. Do not do anything that will show that you have a lot of money. You can also opt not to tell anyone. This will keep you from being asked for money. Just go about your usual life and pretend you are not richer than you were yesterday.
- Think of your goals. In this step, you need to identify the financial targets that you can achieve from the unexpected bonus that you got. If you do not have any idea about your specific financial goals, now is the time for you to start dreaming a bit. What do you want for your retirement? Do you think you can buy your first home now? Stacy said that you can approach goal-setting by imagining yourself in your deathbed. What do you want to be thinking about when you get to that point? That should help get you started on defining specific and detailed goals that you can pursue.
- Get rid of hindrances in going after your goal. The third advise if to get rid of anything that will keep you from reaching your goals. This primarily refers to debt. You do not want to waste any more money on interest rates. So if you can pay all your debts or at least a significant part of it without being charged with prepayment penalties, then go ahead with it. The elimination of the stress associated with the debt is one reward that you can give yourself.
- Make the money work for you. It is actually up to you if you want to pay off all your debts at once but you are strongly advised to grow some of it. Anything that is left from the debt payment is better off invested than spent. You can grow that money even without doing anything. Just put it in stocks, bonds, and mutual funds. That way, you can make the windfall profits earn you more money. Just make sure you diversify your investments.
- Always be prepared. While paying off your debts and investing are important, so if your emergency fund. Stacy warned against the lack of emergency funds and how it can prompt you to sell your investments at the wrong time because of your immediate need. Do not waste your investment. Make sure you do not have to get it by building up your emergency fund.
- Get professional help. Actually, this is only applicable for those who got some hefty windfall profits. You want to ask a financial adviser who is not on commission. Ask them how you can best use your money to secure your future.
- Reward yourself. After you have gone through this list that is the only time you can think about your present reward. If there is anything left, you can buy yourself something nice or go out to dinner with your loved ones, etc. In most cases, going through what your money can do for your debts, emergency fund and investments will encourage you to limit what you spend on present rewards.