‘Where did the money go?’ How to handle a windfall | personal finance

Hal M. Bundrick, CFP®

Taxes devolution. Child tax credits. COVID-19 relief checks. We dream of the next unexpected bundle of money that lands in our lap. Maybe it’s a few hundred dollars won from a garage sale, maybe even more from a job bonus, or hundreds of thousands from a winning lottery ticket or inheritance. Our minds race with the possibilities.

A windfall can be a lifeline to short-term financial relief or a stepping stone to long-term financial stability. But due to our inherent money personality, we may not make the best use of surprise money.

Money decisions in the midst of a crisis

A 2021 study published in the Journal of Family and Economic Issues found that emotions tied to money can dictate whether we decide to spend or save a windfall, even in a crisis environment.

The investigation examined how recipients of COVID-19 relief checks used the money. People with existing financial resources who were previously inclined to save and invest did just that with the COVID-19 windfall, says Sarah D. Asebedo, lead author of the study. Asebedo has a doctorate in financial planning and is an assistant professor at Texas Tech University in Lubbock, Texas.

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“When people with those characteristics enter crisis environments, they have likely developed some resilience in their financial situations, such as an emergency fund or having investments,” says Asebedo. “So they could use their windfall on things like ‘wishes’ or more savings and investments because that’s what they’re programmed to do up to a point.”

Those who needed to make ends meet during the pandemic primarily used the money to pay the debtadds Asebedo.

Defining Your Money Personality

How you handle a windfall, whether it’s a federal stimulus check or an inheritance, is largely tied to how handle money In day to day.

Thomas Shortreed, a behavioral financial counselor in Cortland, Ohio, uses a questionnaire to determine a client’s financial personality. He provides information about our relationship with financial matters. Questions include:

  • How emotional are you with money?
  • Do you prefer to save or spend?
  • Do you reflect on your decisions?
  • How confident are you?
  • How involved are you in financial decisions?

How you answer questions identifies your personality type, Shortreed says. “I can see that type of personality and get a general idea of ​​how you probably think about and process decisions about money.”

Personality types include Money Master, Optimist, Perfectionist, Producer, and Safety Player. You can find similar money personality online tools.

The Difference Between Earned and Unearned Windfalls

Your mind can also react in different ways to the type of windfall you receive.

In many cases, windfall gains such as a job bonus trigger a more long-term focus on how the money is spent, Shortreed says. A little more attention is often given to spending it wisely.

However, sudden unearned money, such as winning the lottery or receiving an inheritance, can trigger a different reaction. As no work was done for it, he says that in many cases it was spent recklessly.

“Money is very emotional. It feels good in the short term to buy things you haven’t had or always wanted.”

An example: Shortreed advised some members of a group of lottery winners.

“The ones I dealt with set aside money for their kids’ college. The others bought all kinds of fun stuff. My clients put their kids through college and they were cool.”

How to handle extra money

Debt can be erased or reduced with a windfall. But many times, we then repeat the same spending mistakes and fail to break recurring debt habits.

When receiving a windfall, Shortreed suggests:

  • Pause and reflect on the good and bad money decisions of your past.
  • Focus on medium and long-term goals, not short-term wishes.
  • Taking into account their fundamental values ​​(family, security, autonomy, etc.).
  • Reviewing your money personality type.
  • Ask a partner to help you hold yourself accountable.

The key to making the most of a windfall: Take your time.

“Separate a little bit between receiving that money and using that money. Give yourself time to sort through all those emotions. You may be excited at first and then for whatever reason you may have some stress or worry about using it the right way.” “Asebedo says.

Consider your attitudes about money, your values ​​and long term goals before receiving a windfall to help alleviate that stress, adds Asebedo.

“Thinking about some of those things before you get a windfall is healthy because if you end up with a larger lump sum, you’ll be more psychologically prepared to make a decision you feel good about later.”

This article was written by NerdWallet and originally published by The Associated Press.

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