A “windfall” is generally a chunk of money that lands in your lap unexpectedly. Perhaps you win a prize/contest. Maybe you receive an inheritance. Your company does very well and gives out unplanned bonuses. You pick a stock that goes to the moon. All these count as a windfall.
A windfall can be relatively small, perhaps a few hundred dollars or it can be a life changing amount that sets you up for financial independence immediately. Either way, a sum of money that shows up in your life out of the blue is a great opportunity to build wealth. It’s a chance to accelerate your FIRE journey and get to the destination a bit sooner.
What should you do if you are fortunate enough to land a windfall? Let’s start with a story about my favorite example of someone who had money raining from the sky.
Bobby Bonilla Day
Bobby Bonilla was a professional baseball player from the mid-80’s until the early 2000’s. He was pretty good, going to the All Star Game six times in his career. I remember him well because he played for some really good Pittsburgh Pirates clubs (my home town team).
In 2000, Bonilla played for the New York Mets and was owed $5.9 million. For some reason, the Mets and Bonilla worked out a deal where they would defer paying him that money. Instead, from 2011-2035 the Mets would pay him $1.19 million a year. Bonilla gets this money every July 1. Fans jokingly refer to the date as “Bobby Bonilla Day.”
Talk about the mother of all windfalls! I would imagine that very few (if any of us) are getting a deal like that! Let me tell you though how I have my own mini version of Bobby Bonilla Day.
My Personal Bobby Bonilla Day
I worked for 9 years for a small, privately held company. This company did not offer a 401K plan. Instead they offered an ESOP (Employee Stock Ownership Plan) along with a profit sharing plan. Basically the way that this worked was they would put some shares of the company stock into a tax qualified account for each employee every year. In addition, each employee had a second account where the company would add some of the company profits every year. The profits account was invested in a bunch of stocks that the company pooled on behalf of the employees.
The plan sucked. The shares were not publicly traded and so every year some accounting firm would appraise the company and set a stock price. You had no control over the investment choices in the profit plan and it was way too conservative for a younger person. There was no website to look at the real time value of your account. And in the end, it was not portable at all.
I quit that company in 2015 and by that time, the account had grown to a non-trivial amount. It represented about 50% of my net worth at the time. However, instead of the company allowing me to immediately roll that money over to a traditional IRA when I quit, they had some pretty ridiculous rules. I had to wait 4 years to become eligible to roll over the money, and then when I did, I found out they had the option to spread the payments over 5 years1! The day of my yearly payouts? August 1.
Starting August 1 2019 and ending on August 1, 2023, I receive a windfall from my former company every year. Ok, it’s probably not technically a windfall since they are just giving me MY MONEY, but it is money that is coming into my life that I am not actively working for. I like to think of it as my own Bobby Bonilla Day.
What should you do if you get a windfall, or some type of regular, deferred payment?
Resist the Urge to Cash Out
The money I get is tax-qualified. This means that I have not paid income taxes on it yet. I will have to pay Uncle Sam when I withdraw the money, and only after age 59 ½. Thus, the money is tax deferred. I have the option of taking my payment in cash or rolling it over into another tax-qualified account like a traditional IRA. By rolling it over, the money retains its tax-deferred status.
If I would have chosen to take the cash, I would have gotten crushed with taxes and penalties. I would have had to pay income taxes at my current tax rate (24%) as well as a 10% penalty for accessing the money before at 59 ½. Over a third of my money gone! Not a good deal for me.
To resist the urge to cash out, I actually instructed my former employer to just send my yearly chunks right to my brokerage. I get a photo copy of the check, but it’s never in my hands and simply gets rolled over. I never have the chance to spend it!
Treat Yourself (Reasonably)
On the other hand, maybe you are getting money that is NOT tax qualified, perhaps in the form of a prize or inheritance. It can be tempting just to spend the money on yourself. I think this is especially tempting if the money is significant, but not earth shattering. I think for me that number would be around $10K.
Instead of blowing it all at once, perhaps leave it alone for 30 days and really think about the possibilities you have for the money. This may help to cool down any immediate desire to spend the money.
It might also be good to treat yourself with a small portion of the money, perhaps up to 5%. This gives you a treat but also preserves the majority of the cash so it can work for you.
Pay Off Debt
If you have debt, especially the high interest variety that is common with credit cards or certain types of loans, by all means, consider paying this off with your windfall. Paying down debt is a fantastic use of a windfall as it helps you shed something that is eating away at your income, so you can start building for financial independence.
Currently, I have no credit card debt and $4,500 left on a car loan (5.9%). The car will be paid off by the end of the year. My mortgage is currently financed at 3% and so personally I am not in a hurry to pay down this loan since I can get much better bang for my buck in the stock market.
Invest For Financial Independence
By investing your windfall for the long term, you will get a gift that keeps on giving. If your dream is to retire early or accomplish some other dream with financial independence, investing your windfall can help get you there sooner.
I invest my “Bobby Bonilla Day” money in a traditional IRA, in low cost index funds. Currently, my account is invested in VFIAX and VGSLX. I don’t plan to touch this money for at least 18 years. Due to a bull market, my payments so far since 2019 have gone up nearly 60% in value!
Help Someone Else
Perhaps the greatest thing we can do if we get an unexpected chunk of money is to use it (or part of it) to help someone in need. Maybe you have a friend or family member who really could use a little bit of help. Or, perhaps there is a charity that aligns with your values who would put that money to good use. Either way, if you are in a position to help someone out when you get a windfall, you are likely to feel great happiness and fulfillment by giving.
Bottom Line
If you get a windfall or deferred payment of some sort, congratulations! Many people never get that experience. Understand that it’s an opportunity and think carefully before taking any action. Either way, continue to work hard, save money, build wealth on your journey to FIRE!