approach to windfalls

[frugalecon]

So I looked at my paystub for tomorrow (they are visible online the day before pay posts) b/c I wanted to make sure my leave had been processed correctly, and I noticed that I am receiving an unexpected end-of-fiscal-year bonus. (In the low 4 digits) Of course I was pleased, but it made me wonder how Mustachians respond to windfalls. Invest it all? Splurge a bit? Knock down the mortgage?

FWIW, I may use part of it for shifting some 2015 charitable contributions to 2014, and just drop the rest in the brokerage account.

[MikeBear]

Jack your 401k deduction up high enough to suck it whole into the 401k. That way you pay NO taxes on the bonus, and get the entire amount.

[frugalecon]

Jack your 401k deduction up high enough to suck it whole into the 401k. That way you pay NO taxes on the bonus, and get the entire amount.

Well, you would defer the taxes, in any event. But I am already maxing out my tax-advantaged savings options, so that is not a strategy I can use.

[RichLife]

Since I am used to maxing everything out already, I tend to direct windfalls to my investment account. Of course I don't have a mortgage, if I did I'd investigate first if it would be better to send it there or if it would make me more when invested. If I have any spending goals around the time some of it may go to that as well, but only if it is a useful or worthwhile purchase.

[DollarsAndDissonance]

I got a large unexpected bonus this year (five figures).  I allowed myself one insanely luxurious "splurge" ($300 dinner for two at a fancy restaurant), then treated the rest just like any other income. 

Since you're already maxing retirement accounts, I would seriously consider dropping it all into your mortgage, but I tend to prefer having zero debt, even at low interest rates.

If you expect your 2014 income to be higher than next year's (e.g., if this bonus won't recur next year), then I think moving the charitable giving earlier makes sense to reduce your tax burden during the higher-income year.  Of course, this only makes a difference if you itemize your deductions on your tax return rather than taking the standard deduction.

[frugalecon]

I got a large unexpected bonus this year (five figures).  I allowed myself one insanely luxurious "splurge" ($300 dinner for two at a fancy restaurant), then treated the rest just like any other income. 

Since you're already maxing retirement accounts, I would seriously consider dropping it all into your mortgage, but I tend to prefer having zero debt, even at low interest rates.

If you expect your 2014 income to be higher than next year's (e.g., if this bonus won't recur next year), then I think moving the charitable giving earlier makes sense to reduce your tax burden during the higher-income year.  Of course, this only makes a difference if you itemize your deductions on your tax return rather than taking the standard deduction.

Yes, my 2014 income is definitely higher, both b/c of this bonus and b/c I was moonlighting for a time earlier this year.

I guess my real question is how frequently people allocate part of an unexpected windfall to a "splurge." To do so seems somewhat anti-Mustachian, but very human.

Rather than pre-paying the mortgage, I have been putting together a ladder of zero-coupon bonds to offset the liability (I get a higher after-tax interest rate and have more liquidity with that strategy), so maybe I will just put this windfall toward that.

[sloof70]

I always tell myself that I'll use an unexpected sum to buy some of the wants that I've had my mind on. Not outrageous things, just stuff that would make life a bit easier, or a toy of sorts I'd had my eye on for a while. But then, when the come, I don't, because the guilt sets in. I think I like the idea of that stuff, more than actually buying it.

[Thegoblinchief]

In my case, it just goes to whatever my current savings/debt allocation is. A very small percentage of surplus cash does get siphoned off as personal spending money for the wife and I.

Pre-MMM it usually got burned in some consumerist blaze of glory....

[Runge]

I have a list of financial goals in a spreadsheet that list out the $ goal, current $, deadline, and an amortization amount. I'll typically put the money towards the first goal so I can finish it off faster and it'll free up money for other goals.

My goals typically are projects for the house, padding emergency funds, money for big trips, and my investment goals. Most of them are non-investment related of course, but I've already sat down and mapped out what they will be for the next year or so after I've set my investment budget.

I'm still in the accumulation stage, only been working for two years now, so I'm spending a bit more on necessary upgrades to the house, saving for a better car so I can pay in cash, and padding/building e-funds.

[socaso]

I keep a list of things I'm daydreaming about buying on my phone. If I get a windfall I might check the list and see if there is anything I still feel compelled to buy. Often the temptation has passed! For a low 4 figure windfall I might buy a cookbook and put the rest in investments. I got a 5 figure windfall this year and gave myself $150 to splurge then banked the rest.

[sloof70]

I keep a list of things I'm daydreaming about buying on my phone. If I get a windfall I might check the list and see if there is anything I still feel compelled to buy. Often the temptation has passed! For a low 4 figure windfall I might buy a cookbook and put the rest in investments. I got a 5 figure windfall this year and gave myself $150 to splurge then banked the rest.

What a spendthrift. You should be ashamed of your squandering ways! How dare you spend 1%...

[Retired To Win]

Earlier this year, we had a $7800 warranty windfall.  (Would you believe, a full refund on a roofing job just because the color of the roof shingles looked a little uneven to the expert company inspector.)

Seeing that the windfall was connected to a home improvement item, we threw the money into the home improvement fund and accelerated several to-do-items on that list, starting with a complete new set of windows for the house.  :)

From time to time, I've had unexpected investment windfalls arising from surprise offers to buy out some company in my portfolio.  Since those windfalls have been investment related, I have just let the money boost up the investment fund.

And so on...

[socaso]

I keep a list of things I'm daydreaming about buying on my phone. If I get a windfall I might check the list and see if there is anything I still feel compelled to buy. Often the temptation has passed! For a low 4 figure windfall I might buy a cookbook and put the rest in investments. I got a 5 figure windfall this year and gave myself $150 to splurge then banked the rest.

What a spendthrift. You should be ashamed of your squandering ways! How dare you spend 1%...

I know, I know. My shame is unending...