Recently we came into a little extra money. Not a lot, just an extra $2000 that we weren’t planning on receiving.
You’d think it would be easy to decide what to do with it, but it has been surprisingly difficult.
The obvious option is to throw it all towards our car loan, since that’s the debt we’re aiming to kill as of now. But the problem with throwing this windfall all at one debt, is that there’s nothing to show for in the end. It kind of feels like we’re throwing it into a deep, dark hole. Well, I guess we sort of are, eh?
Part of me thinks we should use this unexpected money to chip away at some of our other goals instead.
You see, a few months ago, after we paid off our credit card debt, we realized we were now free to start daydreaming about something other than throwing money at Mastercard. A lot of goals were born that day, not only goals to tackle our other debt, but also ones for building our stability for the future.
The 50/50 Rule
In the early days of our marriage we came up with a simple 50/50 rule for windfall monies. At the time were focusing on two goals: 1) building an emergency fund, and 2) paying off debt. So anytime one of us would get a bonus or an unexpected large sum of money, 50% would go to the savings fund, and 50% would go to the credit card debt.
This method worked quite well for our states of mind, since we felt we were making progress on both goals at the same time.
And after our emergency fund goal was met, we’d still use the 50/50 rule with our windfall money, putting half towards debt and half towards another need, or sometimes a want. It’s our way of staying balanced so we feel like we’re moving forward in other areas of life, whilst paying off debt.
So we’re thinking the 50/50 rule will do us well with this latest sum too.
But if $1000 of our windfall is going towards our car loan, what to do with the other $1000?
We could….
- Put it into a savings account for our 10th anniversary trip. We never took an official honeymoon, and we’ve dreamed of going someplace tropical for our 10th, which is just two years away. A-Rob are you okay with tropical? I realize as I write this that we’ve never actually discussed where we’ll go. Now you know my vote.
- Start our first IRA account. We hear that’s what all the cool finance kids are doing these days.
- Purchase a CD, the investment kind that is, and start getting our money to work for us, even if in small amounts.
- Start a 529 fund for our kids’ college. We currently have zero saved for this event that will occur in t-minus eleven years.
- Start saving for the day we will eventually need to replace my car (the one with the hooptie tendencies).
- Start saving for the day we will eventually need to buy a new house.
- This may sound trite, but I am in dire need of some new work clothing. Staring at my small collection of tired tops every morning in hopes that some magical new outfit will appear isn’t working anymore.
- Since we’re going for trite, we could also use the money to buy a new chair. The one in our living room is a cheap Ikea one that sends our guests flying whenever they sit in it. And it sits low, as does our couch, so friends and family members with knee problems have nowhere to sit comfortably in our home, and that just makes me feel inhospitable.
- Or I could invest in myself and buy a plane ticket to Chicago for the Financial Blogger Conference. ;)
I’m sure I could come up with at least a half a dozen more uses for this money, but you get the gist. We have too many pots to fill, and not enough porridge. I love goals, but it can be hard to pursue all of them with limited resources.
What would you do with an unexpected $2000? Would you throw it all toward debt? What do you think of our 50/50 rule?
June 20, 2011 at 7:47 AM
I would throw it all at high interest debt. Life is so much easier when that is gone… it isn’t a black hole– it is literally a gift that keeps on giving each month as you don’t have to pay the interest on the debt you paid off. I forget how much money your car loan is at, but do a little spreadsheet and see how much money you save over the long-haul by paying down 1000 now. How much money does that 1K save you every single month?
That said, investment is also important. Some of your items are investments and some of them aren’t. There will be time for fancy vacations later when your high interest debt is gone and you can truly enjoy the trip. Saving for retirement is incredibly important and will have high paying dividends down the road. CD rates are pretty low, but it’s not a bad place for a second tier emergency fund (or for saving for your car replacement). I wouldn’t do a 529 until you’re shored up on debt and retirement. I’m all for 529s, but they’re not as important as getting rid of high interest debt and securing your future– you can get low interest loans for college, not for retirement. I’d put off the house until your other financial things are in order, especially the car replacement. YES, buy some new work clothing. Not too much, but some. Maybe a new chair– but that’s something you can get used. The financial blogger conference may cost more than $1K once all is said and done.
June 20, 2011 at 8:01 AM
Ah yes, prioritization of goals from least to most important. That might be a good idea in this situation.
June 20, 2011 at 9:04 AM
I feel like we are going through the same dilemma. I just don’t know where to start tackling first once our consumer debt is gone (two months!!). I want to get rid of our car loan, but I also want to start an emergency fund, oh and a Roth and 3 529 plans. Can’t forget about saving up for a vacation, not to mention all our sinking funds like clothing and home repairs/reno. I think it is overwhelming.
I like your 50/50 idea. Could you take the other $1000 and do another 50/50, put $500 toward something practical and the other $500 toward something fun. I guess that would actually make it 75/25 but whatever.
June 21, 2011 at 5:24 PM
There’s just so many good things to do with a wad of cash…
June 20, 2011 at 9:29 AM
How about the 50/25/25 rule?
50 toward debt, 25 toward savings, and 25 to do whatever you want and go crazy? i would need at least a LITTLE something to go crazy.
June 21, 2011 at 4:30 PM
Everyone needs some go crazy money every once in a while. 50/25/25 does have a nice ring to it. :)
June 22, 2011 at 1:22 PM
That’s our ratio, too!!! Love it! :)
June 20, 2011 at 9:48 AM
I want to say to pay down the car loan, but at christmas I got $2,000 from my parents and we bought new living room furniture. So since I can’t walk the walk I won’t talk the talk.
June 20, 2011 at 12:09 PM
This is the second $1,000.00 we’re talking about, right?
Okay, then you and your husband each take 10% – 100.00 and do what you want with it, but only after you have each made a list and sit on it for say, two weeks…then let it rip!
Maybe you could use your money to buy yourself some new clothes…July sales are coming up fast…go to Penney’s or Kohl’s.
Take $700.00 and start a new car fund for your next new (read..used) car. Take the last $100 and start an online Roth IRA for the both of you…$50.00 each at T. Rowe Price. At least, that’s the one I know about.
That way you are achieving goals and having some fun also!
I always feel like I’m spending money when I save or invest, so I fulfill two urges at once…have to fool myself that way…but it works for me! 8-)
June 21, 2011 at 4:29 PM
Well that’s a good way to fool yourself if I’ve ever heard. Thanks for the suggestions Crystal.
June 20, 2011 at 1:27 PM
I vote you do $1500 toward the car payment, then open ING accounts (or any type of savings accounts) for four other goals: $100 for each boy’s college, $100 saving for a Roth (while you research which Roth to open and potentially save up to a minimum), $100 for your next car. The final $100 can go for immediate needs like some new work clothes. Then you’ll feel like you’re making progress toward those other goals, even as you make a big dent in the car payment. Also, once I got those savings accounts started, I didn’t mind making a $5 contribution to a goal, even as I might not have been inclined to start the account with only a few dollars.
June 21, 2011 at 4:39 PM
Very serious hmmmmmmmmmmmmmmm going on here….it’s always nice to have a windfall but it is always hard to decide how to divide it up. I’m getting an extra $5000 from the sale of my trailer and here’s what I’ve decided (so far, could change at any given moment!): $1000 I put into our travel fund for this summer’s trip to PEI; a nice round $3000 onto my line of credit which leaves $1000 to top up my emergency fund, property tax savings account etc. I have more property tax due at the end of August. This will mean that I’ve paid down some major debt, had a bit of fun AND reached my goals in a few accounts a little bit sooner which takes the pressure off a little. I feel like my head has been in a vice the last year and now someone is reducing the tension somewhat – what a great feeling.
Do you have any upcoming large bills you could take care of?
June 21, 2011 at 5:27 PM
Release of the head vice is always a good thing. :)
We’re going to need to buy new tires soon…so that’s something else to add to the mix.
June 21, 2011 at 7:50 PM
Since you have diligently followed your 50/50 rule and continued to pay off your debt, I think you deserve to make an exception and should spend the entire $2000!
Here are my suggestions:
1. Buy the “Clara” chair (currently on sale).
2. Buy new clothes (lots of good sales at the moment).
3. Use the remaining funds towards your family vacation or your trip to Chicago.
Enjoy spending!
June 21, 2011 at 8:18 PM
Haha. Any more votes for me spending the ENTIRE $2000???
I could handle that. Though, my conscience probably couldn’t.
June 22, 2011 at 6:29 AM
Put some away for the tyres, start the college fund and put a little “mad” money toward new clothes to make you feel better at work. (And an equal sum for A-Rob…)
If the college fund is started, then I agree, it’s easier to put more in because it’s one action rather than 2 i.e. start fund and make deposit
June 23, 2011 at 10:17 PM
My vote is for the plane ticket to the Financial Blogger Conference….but that’s partly a selfish reason because I want to meet the faces behind these blogs!! Plus it will cost way less than $1,000. ;)
June 24, 2011 at 7:29 AM
I calculated it would be about $700 including airfare from Phoenix. So yes, less than $1000! Thanks for your vote Sarah.
June 24, 2011 at 8:31 AM
I would not put money in a 529, because you do not have a Roth, I assume from the start a IRA. As long as you have the Roth IRA open for 5 years, you can remove the deposits for anything. Why not open a Roth for their education? I would put a little aside for the work clothes and decide that the next time you get money you will put X% towards something else on your list. For me it would be either the chair or the honeymoon.
June 25, 2011 at 8:40 AM
Hmm. I didn’t know you could finagle IRA funds like that. Thanks for the advice!
June 24, 2011 at 9:02 AM
I find myself in this predicament fairly often, because I do some freelance work in addition to my full-time job. What I usually do with found money is this: If there’s something that I have been wanting for a while, that’s outside of my regular budget, then I use the money to buy it. Anything leftover, I stick into savings, usually divided up between long-term savings and various other short-term goals. My budget is SUPER tight, so it’s nice to be able to treat myself to something small I wouldn’t have had otherwise, and it helps keep me from feeling that I’m just earning money to tuck it away in a place where I won’t see it for a while.
So like, for instance, I recently got a cheque for $300. I’d been desperately wanting an AC unit, so I spent $100 to buy one, and stuck the rest in savings. Even though I put the majority in, the one purchase (sometimes it’ll be something as simple as a DVD) helped keep me from feeling like I’d put it ALL in savings.
I mean, the important thing to remember, too, is that unless you go blow it all on something TOTALLY frivolous (a little frivolous is OK by me), then there’s really no wrong way to spend this money, so don’t over think it. :)
June 25, 2011 at 8:43 AM
Define frivolous. :)
No really, your system sounds pretty good. After being pregnant in Boston in July with no central air, I can sympathize with your desire for an AC unit.
June 25, 2011 at 10:07 PM
I would buy work cloths and put the rest on the car.
June 26, 2011 at 5:12 AM
Ooh, I don’t know what I’d do – but it’s a nice dilemma to have!
When I used to be in debt, I’d have this “rule” of spending 10% of whatever I’d get that was abnormal (and when you’re freelance all money seems abnormal) on shopping of some kind. I called it monster shopping – also had another fun saying: “F**k the bills”.
In hindsight, I think it was a bad idea because it taught me not to save up for the things I wanted. I guess I think teaching yourself the value of saving up for things is better than teaching yourself to inflate your lifestyle any time you get extra money.
Yikes, sound like some kind of Scrooge there. But I do think that mindshift was essential to avoid lifestyle inflation as I made more money over the years. There were some pretty big bonuses I could have spent along the way but didn’t and I’m glad I didn’t. You have to practice on the little wins so that when the big wins of a new job that comes with a bigger paycheck come along your ideology is already fixed – if that makes any sense at all.
July 22, 2011 at 3:52 PM
I tend to throw all my extra money at whatever my most important goal is at the moment. Sometimes I do pick one thing to splurge on though.
I would probably buy new work clothes OR the chair and put the rest towards the car loan since that’s your main goal. With your 50/50 rule you could also apply the rest towards your most important savings goal. If you’re not funding other retirement accounts, definitely start an IRA of some sort, otherwise, you have to decide what’s most important.