If someone gave me a $100, I would walk around as if I’m Donald Trump or Daddy Warbucks. It’s a flush feeling. If we go to dinner, I’m buying. A few days later it would be back to normal with the typical $5 to $20 in my pocket.
What is this behavioral phenomenon of “found money?” We treat a tax refund, a bonus, an inheritance or a winning lottery ticket differently than money accumulated the old-fashioned way (earn it and save it). In a world of financial constraints, the gates to heaven appear to briefly open in a flash of green.
I’ve seen a lottery winner spend it all within a decade and many inheritors spend at a burn rate that could launch a rocket into orbit. More commonly, the annual bonus or tax refund goes toward summer vacation, a kitchen upgrade or a new car.
Being the obligatory wet blanket, curmudgeon, conservative financial guy, what would I do differently? I think a balanced, disciplined approach to “found money” is best.
First, we should top off (or start) our cash reserve fund that covers the unexpected related to home, health, family and employment challenges.
Second, our next steak dinner or beach trip will be more enjoyable if we are not deep in debt. Consider using part of a windfall to pay down a credit card or a home-equity loan.
Third, I would delay gratification by investing some of my new money toward attainment of a long-term goal such as retirement or college funding. It might enable me to increase my 401(k) or IRA contribution or start a 529 education savings account.
Realistically, you should use a portion of “found money” to enjoy something in the present or to bless a loved one or a charitable cause. Major purchases should be carefully considered. A boat or a larger house have carrying costs — likely increased costs such as maintenance, storage, utilities, etc.
My Florida colleague, Susan Bradley, CFP, founder of the Sudden Money Institute, says “(The money) can seem infinite … people often get an ‘I’m invincible, anything is possible’ feeling.”
Susan feels that it is important to allow time to adjust to the new wealth circumstances that follow a windfall. For example, do nothing with the money for at least a few months, if not an entire year. A “money moratorium” acts as a timeout that allows you to come to grips with your new financial situation, sets the stage for better decision-making and gets your emotions under control. She advises a separate savings account to park your new funds out of sight in the interim.
By creating a stewardship plan for handling a new money windfall you can increase the probability of achieving your life goals as well as keeping your sanity intact.