Two keys to spending financial windfalls wisely

Financial windfalls, planned or otherwise, are almost always welcome additions to the family budget. (No doubt they're preferable to large unexpected expenses!)

Whether those financial windfalls are spent or saved wisely, though, is an entirely different matter. Fortunately, it's not that difficult to put these windfalls to effective use. Here are two simple but broad principles that will help you to take full advantage of your windfalls if, and when, they come.

1. If you know that you're receiving a windfall, make sure that you have the windfall in hand before you spend it.

Not all windfalls are planned, but some, like bonuses and tax refunds, may announce themselves beforehand. If you're owed a refund by the IRS and/or your state revenue department, then you'll know how much you'll be getting back if you did your taxes correctly.

Short of taking out an expensive refund anticipation loan — please don't do that! — the refund can't be spent until the check clears the bank, or until the ACH deposit hits your bank account. I heard a story about someone who took the homebuyers' credit last year and bought some things that they needed in full anticipation that their tax refund would come in on time. Well, the refund didn't come in on time, and they were in a bit of financial trouble until it did, quite a bit later. (I think there was a hiccup in the documentation.)

Things can happen that delay a windfall's arrival, so try to avoid going into the hole. Credit card interest and late fees will take some of the fun out of the windfall.

2. Plan for what you'd do with the windfall, regardless of whether you know it's coming, or not.

Getting back to the homebuyers' tax credit, we are expecting that to arrive within a few weeks, and we already know how we'll use a big chunk of the return of our interest-free loan to Uncle Sam, otherwise known as our tax refund. Just by going through the process of deciding how we'll use the money, we're more likely to spend and save it as we've planned. An extra $10,000 in the bank account is downright hypnotizing without a plan in place.

This is a wise exercise to go through, even if there are no windfalls on the horizon. Do you play the lottery? If you do, then please decide now how you'll spend your winnings, how you'll give it away, and how you'll protect the rest of it from all of the long-lost “friends” that crawl out of the woodwork with all sorts of sad financial problems when they hear of your good fortune.

Tyrone Curry, a high school coach in Washington state, did just that. Ten years ago, he decided that if he ever won some money, he'd help the high school to put a track in. Five years ago, he won over $3 million in the lottery. A few weeks ago, he presented the school with a check for $40,000 to put in a new track.

Mr. Curry beat the odds twice: first by winning the lottery, and second by having something to show for his winnings five years later.

So, in short:

1. Make sure the check has cleared.
2. Make sure to check that you're clear on how to use it!

Happy windfalling!