8 August 13
It came at completely the wrong time. After months of scrounging for work the year before and earning heaps less as a result, we learned we were receiving a sizable sum in the form of a tax refund. Turned out I had been on a compulsory savings plan without knowing it. Hooray.
Of course, we certainly could have used that money the year before, when we were counting each cent!
In any event, now the question was – even before the refund was deposited into our account – how best to spend it?
Many of you will have experienced something similar: a refund, an inheritance, a bonus. As soon as you hear of unexpected funds coming your way, a tiny accountant inside your head starts to spin around on a desk chair. The wheels start turning.
Now normally, that little accountant keeps everything in its rightful place: income flows in and gets earmarked for this or that. Mortgage money, car money, beer money – whatever you’ve decided.
But with a windfall, the new money hasn’t been tagged, and suddenly there are all sorts of possibilities. Like that trip to Tahiti or Nepal you’ve dreamed of. Instead of simply a rise in family income for the year, this new money is somehow special.
Since you deserve the best (you really do), it’s easy to justify luxuries that you would never have normally considered. It’s also easy, since this money is somehow extraordinary, to keep it and spend it in a completely different way than the everyday money you’ve got coming in.
But what makes the most sense for your situation? And cents, for that matter?
Financially speaking, the best place to put it would be towards whatever pushes your net worth higher. The higher your net worth, the better position you’ll be in to reach your goals and the more you’ll be able to weather any storms that come your way.
Now you might think that investing your windfall would be best for your finances, but if you are carrying debt, you’ll typically get more bang for your buck by paying it off first. And you won’t need to deal with the risk that comes with investing, either.
If you find yourself with dumb debt on your books, which has some of the highest interest rates around, your windfall could ease the burden that comes with that debt. Our debt calculator can help you figure out just how much interest you’ll save by increasing your payments.
If you have a mortgage, it could be a good candidate for your newfound money. Sorted’s mortgage calculator can give you an idea of how much you would save if you used your windfall to help tackle your mortgage. You could save thousands, or even tens of thousands, by the time you’re done. And speaking of being done, you can also use the tool to find out how much faster you’d finish paying it off.
Since we were not carrying any significant debt, our tax refund went right into an interest-paying savings account, which effectively became our emergency fund. At Sorted we typically recommend setting aside three months of expenses to stay ready for those unexpected turns in life that are bound to happen.
Speaking of – in the past few weeks I suddenly had to fly overseas to be with my ailing grandfather – probably one of the most important journeys I’ve ever made. (He and I have ourselves a deal: he came out here to New Zealand when I got married, so I tried to keep my end of the bargain and turn up as well.)
Wouldn’t you know it – it was the emergency fund that gave me the option to cover the travel without borrowing at all. I wouldn’t have missed it for anything.
Your mortgage – cutting it back can save thousands and get you finished quicker.
Your safety net – if you haven’t yet set aside three months of expenses, here’s your chance.
Your goals – what dreams have you been working towards?