How to Make the Most of a Cash Windfall

Did you land a year-end bonus? Even better, a nice raise? Or, perhaps you’ve been working a side gig and have some extra income to put to work? Also, I know many of you will soon be receiving big federal tax returns.

Without a game plan for how to make the most of a cash windfall, you run the risk of just spending it on whatever. Then, you end up frustrated with woulda/coulda/shoulda regrets.

To make the most of a cash windfall, I want you to devise a long-term plan for how you will always handle extra income.

 My tips:

1. Allow yourself to indulge…a little. I am not going to insist that 100% needs to go toward your financial goals. If that’s what you want to do, great. But I think that giving yourself a small amount to enjoy on whatever you want can help you commit to using the rest to build financial security. I am fine if you earmark 10% or so of your after-tax haul to spend on whatever makes you happy. 
2. Pay down your credit card debt.I am going to keep after this throughout 2019. With interest rates rising, the cost of your credit card debt has been climbing—it is now more than 16% on average—and it could climb even higher this year. Paying off a credit card balance with a 16% interest rate is giving yourself a 16% investment gain. That’s unbeatable.
3. Build up your emergency savings.The end of 2018 was a rocky one for the investing markets, and it has raised concerns that a recession might happen sooner rather than later. With the odds of recession climbing—it’s been 10 years since the last one—you must make it a priority to build up your personal safety net. If you don’t yet have eight months of living costs parked in a safe bank account (hint: online banks offer the best savings rates) this needs to be a top priority. 

In addition to using any cash windfall to jumpstart your savings, I also want you to set up an automatic monthly deposit from your checking account into your emergency savings account. It’s free to do this, and it is the best way to stay committed to building this foundation of your financial security. How much you save each month is your call. I will tell you that when you get as much pleasure from saving as you do spending, you will be on the road to lasting financial wealth. I hope that helps push you to save more.

4. Increase your retirement savings. If you aren’t yet saving at least 10% of your income, now is the time to get closer to that target. Yes, at least 10%; 15% is even better. Your retirement security is going to depend on what you save. 

If you have a workplace retirement plan that includes a matching contribution from your employer, that’s the best, first place to save for retirement. And if your workplace plan offers a Roth 401(k), I strongly recommend you consider using it, rather than a Traditional IRA. You know how much I love Roth IRAs…well, Roth 401(k)s are even better because you can save more. In 2019, anyone under the age of 50 can save $19,000 in a 401(k); the limit is $25,000 if you’re at least 50 years old. And there’s no income limit on who can save in a Roth 401(k). Everyone is eligible. 

If your workplace plan doesn’t include a Roth 401(k), it still makes sense to contribute to the Traditional 401(k) up to the point of the match. Then do more retirement saving in a Roth IRA. You can contribute $6,000 this year ($7,000 if you are at least 50 years old).

If you are single and have income below $122,000 or married with joint income below $193,000, you can contribute the maximum in a Roth IRA this year.