How to Spend that Extra Money

budget, financial independence, FIRE, frugal, get out of debt, how we win, income, investing, personal finance, retirement, savings, savings ratio

Yes, the WinningWilliams have been awfully quiet this summer. Have we given up our thrifty ways for a lifestyle of shallow extravagance? Heck no! But we did give up something really big – our house!

We’ll be doing some posts about our decision to sell, the financial pros and cons of home ownership, and what we are planning to do with the proceeds. Cue this post.

Like others, we wondered what we would do with the large surplus of cash from the sale of the house. Maybe you’ve had a situation where you suddenly have extra money: a birthday present, a winning lottery ticket, a visit from the tooth fairy after a game of amateur ice hockey. No matter how you acquired that extra money, it now needs to be put to good use. Below are some factors to consider when weighing the options for how to spend that cash.

Taxes

This is the least exciting option for everyone involved except Uncle Sam. He’s a greedy jerk, but you have to pay him. Depending on the type of windfall and the means by which you acquired it, you will likely have to deal with taxes. Be sure to look up the tax rules related to your windfall. Examples would include capital gains, inheritance, and/or income.

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Debt

If getting out of debt is your number one priority, then this extra money could certainly help with that goal. Depending on what debt you have outstanding, you may be able to pay something off, or at least significantly decrease that burden. Factors to consider:

  • The interest rate on each separate line item of debt. At what interest rate is it better to pay-off debt or invest your cash balance? As of writing this article, we are in a super low interest rate environment with savings rate yielding next to nothing (online savings rates might get you close to 1%).
  • Say you have an outstanding loan with an interest rate of 4%, when you pay down or pay off that loan you are guaranteeing a return of 4% on those dollars because you have locked in that payment. Future you will save on making future interest payments. However, long-term stock market returns on average yield much higher than this and thus would provide a better long-term value (with a potential rocky ride).  WinningWilliams Rule: if the rate of your debt is less than 4%, then invest, between 4%-6%, your choice, and any debt with a rate above 6%, pay that off immediately.

Investing

This is our favorite option because of the ability to turn some money into a lot more money over time. After weighing the options, that is the way we are planning to channel our windfall. Factors to consider:

  • The size of the windfall will indicate the type of investing. If it is smaller (less than $5,000) you may be able to invest the entire amount at once into the Total Stock Market Index Fund. If the amount is larger, then you may want to Dollar Cost Average. (Check out this post for more insight into DCA v. Lump-Sum Investing)
  • In addition, you should have a high-level idea of what investments to make based on your asset allocation. Your asset allocation depends a number of factors, but most importantly, your risk tolerance and time-frame to invest. WinningWilliams is sticking to a roughly 75% Stock/ 20% Bond/ 5% REIT Allocation. We might give up some return over the long-run with 20% Bonds, but it gives us the comfort to sleep at night. All of our investments are in broad / diversified index style funds with low expense ratios (as J.L. Collins and many other FI gurus recommend).

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Savings

If you want to keep some liquidity you can put this extra money into savings. Maybe you don’t have a large purchase coming up immediately, but you anticipate a high-ticket item in the next few months. Keeping some in your rainy-day fund or a specific savings account may help. If possible, use an online savings account over a standard savings account. The online savings account interest rates are still pretty low, but these are better than the significantly lower rate at traditional banks.

Donate it

Have you made a million excuses for why you can’t give to a worthy charity? Well, now you have fewer excuses. Your money can make some good in the world if you give it a chance. Research the charity of your choice to see how your donation will be used or put a stipulation on your donation to earmark it for a specific fund.

Spend it!

Okay, we know. We have been preaching saving and thriftiness as much as we can. However, sometimes it makes sense to have a little fun. You have worked hard at saving and you may feel that you’ve earned a lunch out with coworkers or a day out with friends. We plan on going out to a nice dinner with some of our extra cash, but let’s be real we are way under on our dining-out budget for the last few months 😉

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