At the beginning of this year, prior to COVID-19, I vowed to myself to put any financial windfall I received toward my debt.
When we hear the term “windfall,” we typically think about an inheritance, winning the lottery, or a large legal settlement. Windfalls can also include sudden spikes in income from, say, a raise, a bonus, or profits from the sale of real estate or a business.
Really, a financial windfall is any sudden unexpected profit or gain over what you usually have. For example, if you're used to earning $2,000 a month, and receive an extra $500, that cash is a financial windfall.
When it comes to spare cash, I have a rough idea of what I should be doing with it but often I don't follow through. Most recently, when the federal government announced that it would provide a one-time special payment through the Goods and Services Tax Credit (GSTC), I found myself filling my virtual shopping carts with bits and bobs — the majority of which I didn't need.
But as we face the sharpest economic downturn in Canadian history due to the coronavirus pandemic, and the threat of layoffs looms large over many of our heads, I figured I should amend my original plan. Instead of allocating any financial windfalls to my debt, I want to figure out how best to use them in these financially uncertain times.
First, take a breather
“In a world of instant gratification, it's easy to see a windfall as a prize,” says Melissa Leong, author of the award-winning finance guide, Happy Go Money. “Something exciting to use for a treat. I've heard of many, many people using their RRSP refund to fund a vacation. That's not free money. That's your money — the government took too much and is giving it back to you.”
Leong suggests you put any windfall aside and take a breather.
“You need some time and distance from it to properly determine how best to allocate it, given your circumstances and your overall money situation. Take a look at your finances as a whole and make a list of priorities. Include some fun but also where this money could help you be more financially sound or help build wealth.”
Right now, it's really about survival. So you’ll need to change the way you think about windfalls.
Challenge your mindset
Nechelle Bartley, financial strategist and founder of Money Basics urges consumers to be mindful when allocating a windfall.
“I’m not the first one to tell people to retract and just stop spending,” says Bartley. “I get how liberating windfalls can be and don't think that's always the solution. But if you do get a windfall, why do you feel the need to spend it right away?”
The point, Bartley says, is to resist that urge to do something immediately with the money.
“We have to start assessing within ourselves why there is a need to get rid of money as soon as it comes to us. That’s called having a scarcity mindset.”
As far as Bartley is concerned, it comes down to your mindset, accountability, and discipline. “Be clear on what your priorities are,” she says. “The more you're able to understand what those priorities cost, you start to realize you need to be a little bit more disciplined in the habits that you have around money.”
Check your savings balance
According to John Eisner, President, and CEO of Solve Your Debts, when it comes to aggressive debt payoff or automated savings and investments, it's okay to put everything on hold right now and focus on building or adding to your emergency funds.
“Whether you've been affected or not [by COVID-19], you need to review all your living expenses from top to bottom,” he says.
That’s an especially prudent move during this pandemic, which has exposed many people's financial vulnerabilities — namely not having enough savings set aside in the event of job loss.
In general, it’s recommended that you save the equivalent of three to six months of your regular fixed expenses in an emergency fund. Given the current global situation, experts told us last month that people should have at least six months of emergency expenses set aside, preferably closer to 12 months.
Here are some questions to ask yourself before you run through a windfall:
- Do I need to add this to my emergency fund?
- Do I have high-interest debt to stamp out?
- Do I have a goal of paying down my mortgage faster? (if, for instance, your bank is allowing you to put lump sums down on the principal)
- Is it the right time to invest? Can I put this windfall toward my future or my family's future by investing in an RRSP, or TFSA, or RESP
- Can I donate some of the money?
If you're still not sure what to do with your sudden windfall, consider a hybrid approach.
“Remember,” says Leong, “it doesn't have to be all or nothing.”