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Last week I wrote on the importance of preparing for crisis scenarios in our family finances (layoffs, large medical bills, Saturn SL1s—if you don’t follow my articles, that’s our family car/nemesis—, etc.). This week we’re going to head in a completely different direction, with preparedness and forethought being the common thread.

How would your family handle a windfall?

Suffice it to say that this is a much more enjoyable imaginative exercise (the cynic in you is likely thinking just how imaginative this scenario seems)! While not as important as preparing for a crisis, this is an important scenario to be ready for. The reason I say this is that unexpected (or expected, for that matter) windfalls, like crisis scenarios, have the potential to greatly impact our financial stability and peace for the long-term. Most of us will experience very few, if any, significant financial windfalls in our lives. This should be incentive enough to make the most of any opportunity that comes our way! Another similarity with crisis scenarios is that financial windfalls are routinely butchered beyond recognition. The state of our financial foresight as a culture is such that we can shipwreck our finances with a crisis or a windfall!

Initially, a thinking person might easily concede that a household can (and often does) squander lump sums of money, but may have more trouble with the idea that a household could actually manage to become worse off.

My friend, you underestimate human ingenuity.

In fact, financial deterioration comes quite easily and naturally in a windfall scenario. It’s as simple as making an impulse luxury purchase that costs money to maintain without factoring in that other income and expenses will remain the same. End result? You are more financially unstable than you were before. The only exception would be if the item itself could be resold for as much or more than it was purchased for (an asset, in other words).

Windfalls are breeding grounds for poorly thought out purchases. As people who live on restrictive budgets, the sudden access to a large sum of money that we didn’t previously have can throw all rationale out the window. $40,000 inheritance! Sweet, I can finally afford a house on the lake (with some friendly financing, that is). Yep, as with increased income, lump sums of money are routinely used to leverage greater debt obligations. Now, maybe I’m just a simpleton, but doesn’t that seem just a bit counterintuitive? Shouldn’t more money equal reduced obligations and greater financial freedom (I know, I’d never make it on Wall Street or in politics)?

We’re not even going to use the classic windfall scenario of winning the lottery for our purposes here. I can already tell you how we would all handle that. We’d buy a whole bunch o’ stuff that we have no use for just because we could, we’d treat everyone that has been loyal to us like dirt, and we’d file for bankruptcy in a couple of years. Yeah, I’m offended that I would suggest that I couldn’t do better than this too. Look, that’s what you do when you win the lottery. It’s tradition.

The inheritance scenario may be the most likely one, but hey, maybe you’ll be one of those people that just gets a huge check from someone or has one of those 15 minutes of fame type things take place. Regardless, we should all be aware of the potential for positive or negative influence that this extra chunk of change can carry. From a psychological standpoint, the fact that we don’t have as direct an association with hard hours of work as we do with normal income can greatly affect the care with which we spend it. It’s money we never had—might as well go hog wild! This is a powerful impulse that we need to be prepared for.

As with crisis scenarios, I think that it is a good practice to envision windfall scenarios and take some time to think about how extra money could truly have the greatest impact on our financial success and peace. These frequently do not coincide with the things that we will find ourselves inclined towards.

A classic example would have to do with housing. Everyone has their dream home floating around somewhere in their minds. A large sum of money could all of a sudden make this accessible (again, most likely with some friendly financing). I think we are often grossly optimistic when it comes to determining our readiness for great luxuries. Just because we now can, definitely does not mean that it is any way advisable.

For Gretchen and I, I can envision a couple of scenarios with a large inheritance or fortunate 15 minutes of fame. We could build our dream home and put down a large down payment, which would most likely leave us paying as much (or more) monthly for housing. Or we could pay off our current house and enjoy the enormous economic impact of a free and clear title. Which scenario leads to deeper sleep at night? Which leads to a greater sense of stability?

As is often the case, instant gratification versus delayed gratification is the battle field. By paying off our current home, we would not be forfeiting a dream home scenario. If anything, we are making that a much more comfortable and sustainable possibility in the future. We would be creating a scenario in which substantial savings can happen, making a cash purchase possible in the future. Way more importantly, we would be giving ourselves the opportunity to change our minds. The beautiful thing about holding off on a non-essential financial decision is that you may later find that there is no decision to be made. Gretchen and I might come to our senses and realize that we are perfectly content where we are. If we build the dream home, we’ve pretty well cast our lot.

This is an enormously important financial/behavioral concept in long-term financial success. We need to recognize our emotional state (even our adrenal state) and learn when to hold off on something. Chunks of money literally do get the adrenaline going and holding off until this phenomenon passes could be the best long-term decision a household ever makes, when it comes to a windfall scenario. Here’s the thing to remember: there is no race to get the money spent. When you get chunks of money (even small amounts, like gifts), get out a chalk board and write that phrase a good 5,000 times or so. If you are like me, chunks of money get the mind going at warp speed to get it spent! It’s not a race. Give yourself time to realize how content you are with what you have, then make decisions on any spending from this place of emotional stability.

Financial advisors love to talk about compounding interest and its power to multiply money over time. I am a firm believer that wise spending choices actually have much more compounding effects on our financial state than interest ever could. In the scenario where Gretchen and I pay off our house, we now suddenly have not only the psychological freedom of the free and clear title, but we also have the huge stress reliever of a monthly budget with a built in cushion. Talk about killing two birds with one stone! In a similar manner, flippant or impulsive spending choices have compounding negative effects on our finances and our mental health

Never underestimate the power of making the boring choice with a windfall. When everyone thinks you’re crazy, you’re probably on to something! I hope (like really really really hope) that every one of us has the opportunity to manage a windfall. If and when this takes place, let’s pass the test and enjoy the fruit for the long term!


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This post was linked to Seasonal Celebrations at Natural Mother’s Network, Welcome Home Link-Up at Raising Arrows, WLWW at Women Living Well, Simple Lives Thursday at Gnowfglins, Your Green Resource at Live Renewed