Financial planning can feel like a long game. You set your priorities and work at them little by little. It can take time to save up for future expenses like retirement and vacation or even for a larger purchase. But sometimes, you get a cheat code! That can be a tax refund, a reimbursement or (if you’re paid bi-weekly), a three paycheck month when payday lines up just right.
If you’re a budgeter (and even if you’re not!), you may wonder about the best way to use this extra money. There are several ways to use your windfall to increase your financial security. Some options may be mathematically the most strategic option, but the best choice for you is the one that feels best to you. Whether you build an Emergency Fund, pay down debt or get a month ahead is up to you.
Depending on where you are in your budgeting journey, here are a few ideas on what to do with a windfall. Remember— it’s totally okay to use a combination of these!
1. Fund your True Expenses. If you’re focused on paying down your debt, it may seem strange that I’m listing this first. In working with YNABers, we’ve found that funding true expenses or emergency funds is key. It’s what helps you prevent creating new debt as you pay down your existing debt. If you throw every penny at debt pay-down, what happens if you suddenly need new tires or an appliance goes out? You’ve thrown all your money at your debt and now you have to create new debt to cover this emergency. Focus on setting aside at least enough money to cover an emergency and your path out of debt will be much smoother.
2. Pay down debt. If you have a high interest loan or credit card, a windfall may allow you to make a significant dent in that debt. There are plenty of opinions out there about which debt you should pay down on first. The best choice is the one that feels right to you. You may choose to pay down your debt with the highest interest rate. If you have a lower interest rate debt with a small balance that you can pay off in full, that may be a better option for you! Having fewer outstanding debts can feel like a big win, which can be worth the interest rate tradeoff.
3. Get off the credit card float. Let’s say you’ve already funded your True Expenses and you’re paying the statement balance on your credit cards every month. Check your Credit Card Payment category — does the Credit Card Payment category match the working balance on the card? If you’re paying your statement balance on your credit cards but you don’t have enough cash set aside to pay the card off in full, you’re on the credit card float. To get off the float, you can assign some of the windfall directly to the Credit Card Payment category. When the pile of cash in your Credit Card Payment category matches the working balance on the card, you know you have the ability to pay the card off in full at any time!
4. Get a month ahead. We also call this “breaking the paycheck-to-paycheck cycle.” When you’re a month ahead, you can fund all your categories on the first day of the month. You don’t have to budget for the first half of the month and then wait until your mid-month paycheck comes in.
This can look two different ways in YNAB (check out our recently updated help doc here to see more about the “how”). One option is to click ahead to the next month and start assigning money into the categories in the future month. If you get a paycheck and you don’t need any of that new money that’s in Ready to Assign, click ahead to the next month and start funding your categories there. When you get paid again, you’ll do the same thing. Each time you have money you don’t need in the current month, click ahead and assign it in the next month where you haven’t fully funded yet.
The second option is to create a holding category for your future cash. This is the setup I use and I love my Next Month’s Money category. I know exactly how much my monthly pay is and it makes me so happy to see that full month of cash sitting in the budget, waiting for next month. Before I roll over to the new month, I move the contents of the Next Month’s Money category to Ready to Assign. Then I click ahead to the new month and start assigning!
5. Think about the future. If you’ve handled items 1-4, it’s time to think about the future. What are you saving and planning for? A downpayment on a home? A new vehicle? A wedding or vacation? What about retirement or other investments? Budgeting isn’t just for when you’re close to the financial edge. You can continue to prioritize your money even as you become more and more secure financially! Create categories for your future (even far future) expenses and start assigning money there. That way, you’re prepared for future opportunities!
An alternative idea–Buy something fun. While these other ideas are designed to help you get ahead financially, it’s also okay to spend some of your windfall on something completely fun. If you’ve been working hard on getting ahead for a while, restriction fatigue can set in over time. It’s possible that the best thing you can do with some of your windfall is to assign it straight to a Fun Money or Wish Farm category. Budgeting doesn’t have to mean deprivation. Sometimes rewarding yourself for getting ahead can be good for your morale and help re-fuel you to reach goals in the long-term.
When I help my kids with their budget, I always recommend that they create a category for an impulse purchase–even if they just spend the money right away. Taking the time to intentionally assign money is important. Create a category in your budget and assign the money for that purchase to the category. This is more powerful that covering overspending later–you’re choosing how you’ll spend your money before you spend it.
No matter what you do with your windfall, the key is to actively decide how to save/spend it rather than letting it roll into your account balance.
If you don’t already have a budgeting system, a three paycheck month is a great time to get started. Check out a free 34-day trial of YNAB and start giving those new dollars jobs!