windfall

4 Smart Things You Should Do With Your First Real Paycheck

Denise Hill — Tue, 22 May 2018 08:00:37 +0000

You've finally landed your first real job. And with that, comes your first real paycheck. This is a monumental occasion and should be celebrated. But what should you do? Should you blow all of your funds on an expensive and wild weekend? Should you buy a new wardrobe? Or should you just pay your bills and save the rest?

The answer to this question depends on your overall financial plan, your budget, and your surplus once you've met all of your obligations. An important thing to do once you receive that first check (preferably before) is to establish a plan. It's OK to splurge a little and celebrate the fact that you are officially a taxpaying, adulting member of society. However, it's critical that you use this first paycheck to jump-start your journey to financial independence.

Here are some important money moves you should make with your first real paycheck.

Let your money breathe

This sounds ridiculous, I know. But one of the biggest challenges people with newfound wealth face is getting used to having money.

One of the most important things to remember is that your thoughts, beliefs, and attitudes about money directly influence how you spend it. When you're not used to having it, it's easy to spend a small windfall immediately. And often, you overspend. You have to give yourself time to acclimate to having money. Paradigm shifts take time. Allowing your checking and savings account to remain full can be difficult.

If possible, allow the money to sit for a while. Pay your bills and let what's left breathe. Buy only what you absolutely need, at least at first. You don't have to go out to eat, buy new clothes, or cop a new ride just because you're earning steady money. Begin conditioning your mind to enjoy seeing a positive checking and savings balance. And vow to keep the trend going.

Create a budget

The most important thing to do with that first paycheck is to create a budget before you spend a dime. Once you see exactly what you're working with, establish a spending and savings plan by creating a zero-based-budget. You want to give every dollar a purpose. There's no such thing as leftover money or a surplus. Every dollar is accounted for, and if you do find a way to save a buck, that buck goes to savings.

Creating a budget is a great way to set a good financial habit moving forward. It's like establishing a healthy diet, but with finances. It helps you determine correct portion sizes and helps you guard against overextending yourself and becoming house poor. It allows you to see where every dollar is going. It also helps you to better track your spending and find ways to save during lean times. (See also: How to Budget When You're No Longer Broke)

When you receive your first paycheck, make a list of all of your regular monthly bills, debts, and necessary expenses along with the due dates, in order of importance. This not only helps you see what needs to be paid and when, but it also helps you establish payment priorities in case there ever is a shortfall.

There are multiple budgeting, bill pay, and tracking apps that can help you streamline your finances. But the most important thing is getting it all written down — in some form — and having a plan. Taking the time to organize your finances and create a budget with your first paycheck sets you on the path to good financial stewardship. (See also: These 5 Apps Will Help You Finally Organize Your Money)

Establish a solid savings plan

After you've listed and prioritized your bills and expenses, it's important that you add savings to the budget and move it to the top of the list. It should be ahead of everything. Your budget shows you how much you owe and how much you have left after the necessities are paid — which allows you to determine how much you should save each month. The old financial advice, "Pay yourself first" is still very true and should begin with your first paycheck.

Start by establishing how much you can afford to save and lock in that number. If possible, set up an automatic transfer so that as soon as your paycheck is deposited into your bank account, your savings amount is automatically transferred to another dedicated savings account. That way you never see the funds. You won't miss what you never see.

Part of savings involves establishing your retirement and emergency fund. Traditionally, an emergency fund is three to six months' worth of daily living expenses, but can be more or less depending on your particular circumstances. This fund should only be used in real emergencies, like an urgent medical bill or a job loss. (See also: 7 Easy Ways to Build an Emergency Fund From $0)

If you work for a company that offers a workplace retirement plan, use your first paycheck to establish how much you'd like to contribute. You should contribute something, even if it's a small amount at first. If you are self-employed, freelancing, or work for a startup that doesn't have a workplace retirement plan option, look into setting up an IRA through your banking institution or other reputable financial management firm. You may need to save up a minimum amount to open an IRA, but you can use a portion of your paycheck as the first step toward saving that amount. (See also: 11 Basic Questions About Retirement Saving Everyone Should Ask)

Set financial goals

After you've gotten your budget in place and saving money is at the top of the list, it's time to set some financial goals. Setting financial goals is important for a variety of reasons. It helps you stick to a realistic budget. It puts something concrete out in front of you and challenges you to go get it. It gives you a purpose for earning, saving, and spending money. Even if you don't reach your goal, you still make progress and move forward. Setting financial goals allows you to view money as a tool that will help you live an independent life.

Financial goal setting is pivotal to becoming and remaining financially independent. You should set immediate, short-term goals (less than six months), some intermediate goals (up to three years), and some long-term goals. Write down legitimate things you want to do with your money and determine the steps you need to take to reach each goal. Make sure your goals fit the SMART frame work (Specific, Measurable, Achieveable, Realistic, and Time-bound) and fit your lifestyle and unique situation. (See also: 5-Minute Finance: Create Financial Goals)

Your first few goals should be to live by your budget, maintain a healthy emergency fund, and kickoff your retirement savings. From there, make other goals that will help keep you on track, such as eliminating debt or paying cash for your next car or vacation.

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This article is from Denise Hill of Wise Bread, an award-winning personal finance and credit card comparison website. Read more great articles from Wise Bread:

6 Smart Things to Do With Your Bonus

Damian Davila — Wed, 18 Mar 2015 15:00:15 +0000

"The windfall of great riches can, if mismanaged, make things worse, not better, for the recipients," said American author and professor Michael Mandelbaum.

But you don't need a college degree to know that extra cash shouldn't be spent frivolously — that part is easy. The hard part is actually figuring out what exactly qualifies as a good way to use a small windfall. Here are six simple — and most importantly, smart — things to do with your bonus or commission check.

1. Build an Emergency Fund

One in four Americans has no emergency savings. If you're guilty as charged, then use your bonus check to set up your emergency fund stat. A good rule of thumb is that your emergency stash should cover six months of living expenses.

When calculating your monthly expenses, go beyond just your mortgage or rent payment and include important recurring payments such as groceries, utilities, and minimum debt payments. If the final number shocks you, take that as a wake-up call about how important it is to have your emergency fund in place.

2. Pay Off High Interest Debt

By only paying the minimum on your maxed out credit cards, you're shelling out way more than you should.

Let's assume that you have balance of about $2,461 on your credit card with an APR of 12.24%. If you make no additional charges, and each month you only pay the required minimum of $50, you will pay off the balance in — get this — 17 very long years! Even worse, you'll end up paying a total of $4,753, or nearly twice what you originally owed!

Be smart and pay off those high interest credit cards pronto. (See also: When to Do a Balance Transfer to Pay Off Credit Card Debt)

3. Max Out Contributions to Retirement Accounts

In 2014, workers and their employers averaged $9,670 in 401(k) contributions. While this number may seem impressive, keep in mind that the contribution limit in 2014 was $17,500.

There is still a lot of room for improvement in our nest eggs. This year, there is even more. In 2015, the IRS bumped up the contribution limit for 401(k) and profit-sharing plans to $18,000. For those age 50 and over, you are permitted to make an additional catch-up contribution of $6,000 to traditional and safe harbor 401(k) plans, and $3,000 to solo 401(k) plans. (See also: 5 Dumb 401(k) Mistakes Smart People Make)

Making out your contribution to your retirement accounts is also a great way to defer income taxes until retirement, when you're more likely to be in a lower tax bracket.

4. Start Saving for College

Data from the U.S. Department of Labor shows that workers with four-year college degrees have an hourly rate earning 98% higher than people without a degree. The same data shows that the gap is continuously increasing over time.

This means that saving up for your, or your kids', college education is a smart thing to do with your commission check. A good way to save for college is via a 529 college-saving plan, because in 34 states and the District of Columbia, you can receive a state income tax deduction for your contribution.

To make sure that your higher education investment pays off, double check the market value of your or your child's college diploma. Some degrees aren't worth their cost.

5. Get Better Banking Options

Your lucky windfall could unlock some better banking opportunities.

By maintaining a larger account balance, you could qualify for a better interest rate. For example, my credit union currently offers an annual percentage yield of 0.20% for balances below $25,000, 0.25% for balances between $25,000 and $99,999, and 0.30% for balances over $100,000.
Depending on your financial situation, you may not have access to free checking accounts. Make use of your bonus to pad your checking account and meet the minimum threshold for avoiding any fees.
Determine if your bank can offer you a better deal with a larger account balance. If your bank can't provide you one, it's time to shop around for a better financial situation. (See also: 9 Good Reasons to Choose a Credit Union Instead of a Bank)

6. Prepare for Taxes Next Year

Last but not least, it can be wise to start preparing for next year's tax season now.

Your year-end bonus may put you in a higher tax bracket this year. Ask your employer if he or she can defer your bonus (or at least a portion of it) in order to lower your tax bill this year.
Keep in mind that most employers opt to slap a standard 25% withholding rate (39.6% for amounts over $1 million) on bonuses and commissions. If your usual tax rate is far below that 25%, then you may already have paid enough in taxes this year. You'll need to adjust your W-4 form to decrease how much is withheld for taxes for the rest of 2015.
Ask your human resources department which withholding option works best for you. Besides the standard withholding rate, the IRS allows employers to treat the bonus as regular compensation or take additional taxes only from the bonus check.

Every year, 75% of U.S. taxpayers withhold too much tax. Don't become one of them and plan ahead. You want to enjoy as much as possible from that well-deserved bonus or commission check.

What are you planning to do with your bonus or commission this year?

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This article is from Damian Davila of Wise Bread, an award-winning personal finance and credit card comparison website. Read more great articles from Wise Bread:

4 Great Investments That Sounded Really Stupid in the 2000s

Damian Davila — Mon, 23 Feb 2015 14:00:07 +0000

Ridicule and high return are often positively correlated.

In the 1970's, there was the pet rock craze, which reportedly made $15 million in its first six months. Now fast forward to 1989 — would you have invested in the penny stock of a homebrew computer maker? Well, a $5,000 investment in Dell that year would have made you $4.5 million by the end of 1999.

History tends to repeat itself. Here are four investments that sounded really stupid in the 2000s, yet ended in big paydays for their early investors.

1. Santa Mail

If you're a fan of the TV show Shark Tank, you know that it takes a bold pitch with big numbers to impress the sharks.

Well, how's this for a pitch? "New York City's Operation Santa responds to about 500,000 letters to Santa every year for free. However, every year millions of American children write to Santa hoping to get a reply. My plan is to capture some of that market and charge parents about $10 for a personalized letter from the big guy himself! Are you ready to invest, sharks?"

This investment proposition sounded really stupid back in 2001 and it probably still does today. However, entrepreneur Byron Reese stuck to his guns and sold 10,000 letters in his first year of operation. His company Santa Mail has delivered over 350,000 personalized Christmas letters since then. With over $3.48 million in revenue over the years, he's surely having a Merry Christmas now!

2. Lucky Break Wishbone

After Christmas, Thanksgiving may be the second most important holiday in the U.S.

For those of us who love to enjoy a turkey on that day, we often have to fight for a chance to take a crack at the lone wishbone. In 1999, Ken Ahroni thought there had to a better way than fighting over the dinner table for choice turkey.

He devised a plastic version of the turkey wishbone and started selling them in 2004. His goal was to give folks a chance to make a wish with every single family member and friend — not only on Thanksgiving, but also the rest of the year.

His silly idea paid off. According to Investopedia.com, within two years his Lucky Break Wishbone Corporation was generating nearly $1 million in sales. You can find his product in several retailers, including Whole Foods, Fred Meyer, and Urban Outfitters.

Now, that's a lucky break!

3. Yelp

I bet you that you have already used or will use Yelp this week.

While Yelp is now a household name, it wasn't always so. Back in 2004, Jeremy Stoppelman and Russell Simmons were riding high on their successful stint at digital wallet company PayPal. Jeremy and Russell decided to leave Paypal and start their own "high tech" company.

What was this revolutionary idea that made them leave their cozy job? An email-based referral network dubbed Yelp. On top of its silly name, Yelp's original platform was so complicated that it didn't attract investors beyond the co-founders' friends and family.

However, Jeremy and Russell didn't give up and re-focused their company around a review feature. The rest is history. Yelp's user base grew from a total of 12,000 in 2005 to approximately 139 million monthly visitors in 2014. Despite its growing revenue throughout the years, there were still plenty of skeptics when Yelp went public in March 2012 at $15 a share. A $1,000 investment in Yelp then would be worth about $3600 now.

4. Slanket

When you think of sleeved blankets, you probably think of the Snuggie.

However, that's not the original wearable blanket. That title belongs to the Slanket. Created in 1997 by Gary Clegg, the Slanket was first used as a way to stay warm while flipping TV channels late at night in a cold dorm room. This investment idea sounded so stupid that Clegg waited until 2005 before fully committing to it.

His first run of 1,200 units sold out in seven weeks — a sign that he had to move really, really fast to keep the market. He enjoyed a successful run of QVC sales and was finally ready to introduce a cheaper version, called the Snuzzle, to big box retailers. Instead, in the fall of 2008 the Snuggie aggressively entered the market and became the new king of sleeved blankets. As of 2013, Snuggie has pulled in more than $500 million in sales.

While the Slanket is still selling, it has been estimated that the Snuggie has outsold the Slanket 20-to-1. The Snuggie has been such a hit, that there's even a version for pets!

If you snooze, you lose!

Ghandi said it best; "First they ignore you, then they laugh at you, then they hate you, then they fight you, then you win." These four ventures are proof that dedication to your ideas, no matter how much they may be ridiculed, pays off in the end.

What "crazy" investment from the 2000's do you wish you had jumped on?

This article is from Damian Davila of Wise Bread, an award-winning personal finance and credit card comparison website. Read more great articles from Wise Bread:

Stop! Don't Make These 6 Dumb Mistakes With Your Financial Windfall

Kentin Waits — Mon, 02 Feb 2015 14:00:08 +0000

Maybe your lottery numbers finally came in. Maybe a favorite aunt remembered you in her will. Heck, maybe one day while you were shootin' at some food, up through the ground came bubblin' crude — oil that is! Texas tea! (See also: 50 Smart Things to Do With Your Tax Refund)

Whatever the source, you're the lucky beneficiary of a financial windfall. Revel in it and protect your new-found wealth by avoiding these six dumb moves.

1. Act Impulsively

Receiving money unexpectedly is exciting, and it can send even normally down-to-earth folks straight into the stratosphere. In those dizzying weeks and months following a financial windfall, we're really not ourselves, so making big decisions during that time is usually a terrible idea. Instead of spending or investing immediately, take a time out. Collect yourself. Adjust to your new wealth for six months or a year and just let the cash sit in a money market account or CD. Remember, high emotion and sound decision-making usually don't mix.

2. Buy a New Car

Even if you're paying cash, there are many reasons to avoid buying a new car. Not only is it the most cliché thing you can do with a windfall, but it's also one of the quickest ways to lose roughly 25% on every dollar you spend. The minute you sign the paperwork and drive off the lot, that new car becomes used. Depreciation takes a quick and silent bite out of your new ride. Let someone else absorb that financial hit; buy a pre-owned late-model car that's still under warranty.

3. Loan Money to Friends and Family

Making loans to friends and family is a sure way to take the wind out of your financial windfall. Loans have a curious way of never getting repaid, and once your bank balance dwindles, hard feelings can set in and slowly erode relationships. If a loan is unavoidable, find out how to increase your chances of repayment without sacrificing the relationship. Better yet, if someone dear to you truly needs a hand up, simply make a one time cash gift with no repayment expectations.

4. Sink It All in Stocks

Certain stocks can be great investments — as part of a balanced and well-diversified portfolio. But for newly-minted investors flush from a financial windfall, a measured and balanced investing strategy just doesn't sound sexy. And while investing in the performance of individual companies might sometimes pay off over the long-term, it sets new investors up for a wild ride and turns what should be a well-considered and tactical process into a simple roll of the dice.

5. Pay Off Your Mortgage

Paying off our biggest expense can be immensely satisfying, but in an era of low interest rates, it may not be the most strategic decision. Think of it this way: If you have a 30-year fixed mortgage rate of 3.85%, but could realistically average 8.5% in a good mutual fund, wouldn't every extra dollar devoted to paying off your mortgage lose 4.65%? Of course, everyone's circumstance is different; factors like your age, the number of years remaining on your mortgage, the interest rate, and how long you plan on being in your home are important considerations. The point is this: Don't automatically assume that paying off your mortgage is the way to go.

6. Handle Everything Yourself

As wonderful as it is, money has a way of complicating things. Large financial windfalls often result in more complex tax issues, require much clearer estate planning, and demand a more active and engaged investment strategy in order to protect and grow wealth. It's important to be honest about the limits of your personal expertise and seek counsel from a professional. Explore hiring a CFP (Certified Financial Planner) for help and advice.

There you have it — six of the dumbest things you can do when life hands you a pile of cash tied with satin ribbon. If you run headlong into each one, chances are you'll outlive your windfall and resort to buying scratch-off lottery tickets to recapture the magic. If you avoid all or most of these mistakes, you can put that windfall to work and turn one good fortune into a lifetime of security and wealth.

Have you ever been the lucky recipient of a financial windfall? Do you have any regrets about how you managed the money?

This article is from Kentin Waits of Wise Bread, an award-winning personal finance and credit card comparison website. Read more great articles from Wise Bread:

You Can Guarantee a Win and 9 Other Bizarre Facts About the Lottery

Paul Michael — Mon, 09 Jun 2014 09:00:42 +0000

It's something many of us dream about, but few will ever experience: Winning the lottery. The idea of buying a ticket for a few bucks and turning it into hundreds of millions of dollars overnight is tempting to say the least. We all know it's not very likely to happen. Still, that doesn't stop millions of us playing it every week. And you'd be amazed by some of the stories and facts that the lottery produces. Here are the top 10 bizarre facts about lotteries, in no particular order. (See also: Playing the Lottery Is a Bad Gamble)

1. Non-Winning Tickets Can Be Used Again

Don't just trash your losing tickets. Whether scratch cards, quick picks, or personal numbers, those tickets can be used again to enter second-chance drawings. This is something done by the different lotteries to help with customer loyalty and ease those feelings of loss. However, you probably never heard about this because they rarely advertise the fact. Some states require you to mail in your ticket, others want you to register the serial number. But it's a free entry, so why not? Check your state's second-chance lottery after every draw, and you might get lucky.

2. Good Manners Cost One Powerball Player $590 million

When Mindy Crandell went to buy her ticket from the local Publix supermarket, she let an 84-year old woman step ahead of her in line. It was a nice, polite thing to do. And it cost Mindy a fortune. That old woman who went ahead of her purchased a Quick Pick ticket, the one Mindy was supposed to get. Gloria C. Mackenzie, the Florida retiree, collected over $370 million before taxes, the lump sum option. Mindy got nothing, except perhaps the chance to reevaluate her politeness.

3. You're More Likely to Be Killed By a Vending Machine Than Win a Lottery

Sad, but true. Most lotteries have insurmountable odds. The Mega Millions lottery, for instance, has odds of 176 million to 1. That means you have a greater chance of being killed by a vending machine (112 million to 1), becoming president (10 million to 1), dying from being left-handed (4.4 million to 1), or dying in the bathtub (840,000 to 1). In fact, if you decide to leave the house now to buy a lottery ticket, the odds favor you dying before you ever buy the ticket than actually winning the jackpot.

4. You Can Guarantee a Lottery Win, but It's a Logistical Nightmare

Usually, buying up almost every combination of lottery tickets is self-defeating. For a jackpot of only $20 million dollars, you'd have to spend many times more to put the odds in your favor. However, when the jackpot becomes huge, over $400 million, then the math starts to make sense. However, organizing such an endeavor would take a syndicate of massive proportions. The venture has all kinds of problems, including severe trust issues, and the settlement of the winnings would take a small firm of accountants. The other option would be for a single multi-millionaire to corner the market, but anyone with such funding behind them would have far better ways to guarantee a return.

5. Many Lottery Winners Blow Their Fortunes Quickly

The problem with coming into a lot of money very quickly is that it took no discipline to get it. It's free money, and because of that, it's not always shown the respect of earned money. Another problem is a lack of knowledge of basic financial principles by the winners. $15 million seems like an unspendable amount of money, but these days it's not. It should last a lifetime with careful investment, but start buying houses, cars, yachts, and party nights, and you could see that fortune crumble in just a few years. Michael Carroll, a garbage man in the UK, did just that. He won around $15 million at the tender age of 19, and eight years later he'd blown it all and was back on the garbage truck again. (See also: People Who Became Millionaires Overnight and What They Did With the Money)

6. Fortune Cookies Can Predict Winners

Well, of course they can. The random selection of numbers printed in fortune cookies have the same chance of winning as any other random set of numbers. And that's just what happened in 2005. A random group of 110 people played the same fortune cookie numbers and each one thought they had won the whole $19.4 million jackpot. Instead, 89 winners received $100,000, and 21 got $500,000 as they had opted for the Power Play. It's not a bad haul, but it's not the fortune they were expecting. There was even a fraud investigation looking into the strange result.

7. The "1,2,3,4,5,6" Combo Is as Likely as Any, but You Should Never Play It

Statistically, that selection of numbers is not ridiculous to play. If you replace the numbers with symbols, it's easier to see why. However, there are several reasons not to play that sequence.

First, there are thousands of people who play it, because they believe the same thing. Hey, it has to happen some time. So if it ever does come up, you'll be sharing the jackpot with a lot of people.

Second, despite the odds being the same, the sequence has never yet been chosen, suggesting that although the numbers alone have the same chances, the combination may not. I'm no mathematician, but this person has done some extensive research on it. It seems you're better off with a bunch of random numbers.

8. Some Lives Are Ruined by Winning the Lottery

Be careful what you wish for. What we think we need to be happy is not always what will actually bring us happiness. And money, well, that's the biggest red herring of them all. While it's true that a lack of money can make you unhappy for obvious reasons, drowning in it will only bring short-term pleasure. From breaking up families and friendships to death threats and prison time, the lottery has been an ironic windfall for many people over the years.

9. You Better Know Where You Bought That Ticket

When the million-dollar jackpot comes up, lottery officials don't just hand over the cash if you have the winning ticket. They do checks to make sure you were the one who bought it, and where you purchased it. A case in 2010 puzzled Iowa lottery officials when no one came forward to claim the $14.3 million prize. Then, one year later, two hours before the deadline, a New York man named Crawford Shaw presented the ticket via two attorneys. The story from Crawford is suspect, evidence is sketchy, and as of December 2013, the mystery has still not been solved. And as such, the money has never been handed over.

10. Scammers Use the Names of Lottery Winners

Perhaps the most famous case of philanthropy from lottery winnings, in recent years at least, was the story of Violet and Allen Large. The elderly Canadian couple won over $11 million in July 2010. They gave over 98% of it away, saying that they were comfortable and had each other, which was the most important part of life. That was an open invitation to scammers though. They used the names of Violet and Allen in an email scam, claiming to be giving away millions. It works like any Nigerian email scam, so if you ever get one from them, know that it's completely bogus.

What would you do with your lottery winnings? Please share in comments! [Buy a Zeppelin and travel the world in it. — Ed.]

This article is from Paul Michael of Wise Bread, an award-winning personal finance and credit card comparison website. Read more great articles from Wise Bread:

12 Smart Ways to Turn $500 Into a Better Future

Emily Guy Birken — Mon, 31 Mar 2014 09:36:22 +0000

Do you have a little extra money you don't know how to spend? Maybe you've been tweaking your budget so that you now have $500 saved. Or perhaps you've just received a nice little tax refund, or you've been saving your $5 bills for a while and realize that they add up to the equivalent of five Benjamins. What do you do now? (See also: 5 Savings Tricks You Haven't Tried)

You've worked hard to save that money, so you want to put it to good use. You might think it's not enough to really invest in anything useful, but nothing could be further from the truth. A smart investment of your $500 could reap some very big rewards. So the next time you're wondering what to do with a spare $500, plan on doing one of the following.

Traditional Investments

Yes, $500 really is big enough to invest in stocks and bonds, whether via a retirement account or a brokerage account.

1. Contribute to Your Retirement Account

The $500 you put into your 401(k) or IRA today will grow to over $8,700 in 30 years, assuming a 10% yearly interest rate. If your employer matches your contribution and you have not yet reached the matching limit, then your $500 will be worth even more.

While you're at it, adjust your monthly contribution to your 401(k) up by $42. That equals an additional $500 per year, and you'll never miss the money from your paycheck.

2. Consider an Exchange Traded Fund

If you already have an IRA or brokerage account, then you could use it to purchase a commission-free, indexed ETF. These investments are like mutual funds, in that they have a variety of assets within each ETF, but they trade like stocks. They also have lower expense ratios than mutual funds. Since $500 is a low investment to start, you will want to find an ETF that does not charge a commission and that keeps its expense ratio very low.

3. Invest in the Stock Market

If you already feel like you're on a good path with your retirement account, you might try your hand at stock investing with your $500. Stocks are risky assets, but that also means they offer the greatest opportunity for big returns.

However, since nearly all brokerage accounts (which you have to have in order to play) charge a fee per transaction, it does not make sense to try to buy and sell your way to wealth. Instead, choose a stock that you can purchase and "forget" about. Ideally, you'll want a large company that you can rely on for decent growth and whose stock pays dividends. (See also: Getting Started With Index Funds)

4. Make a Peer-to-Peer Loan

Peer-to-peer lending allows borrowers to qualify for loans at rates that they generally would not be able to see from banks, while the lenders are able to invest smaller amounts and get higher returns than they could find elsewhere. In addition, investors in peer-to-peer lending are not charged fees, so your entire $500 can go toward growth.

5. Improve Your Investment IQ

If options one through four were all Greek to you, and the thought of your (non-existent) retirement account puts you in a cold sweat, then spending your $500 on your own financial education could be an excellent investment. For instance, you could spend your $500 on Business Insider's list of the 22 most important finance books ever written. Not only will you provide yourself with an excellent reading list for the year, but you will improve your understanding of investment, finance, and past market disasters.

Alternatively, your $500 will pay for a meeting or three with a fee-only financial planner who can help you define and start working toward your financial goals. Generally, you can expect to pay between $100 and $150 per hour to meet with a fee-only planner, which ought to give you enough time to set up a financial plan for your future. Find a fee-only planner in your area at napfa.org.

Invest in Your Home

With just $500 you can spruce up a room, improve your home's energy efficiency, or protect your important papers.

6. Buy a Safe

If you're like most people, you have important papers scattered around your house that you've been meaning to put someplace secure for a long time. Purchase a fire-resistant safe to protect all of those documents — especially in case of a fire, flood, or zombie apocalypse.

You can find a good safe for prices as low as $200. Plan on cashing whatever is leftover of your $500 and keeping it in your safe. In addition to your important documents, you will also need some cash in case of an emergency. (See also: Add These Items to Your Emergency Kit)

7. Insulate Your Attic

Whether you buy some blanket insulation rolls or rent a blower to blow loose-fill insulation into your attic, you can easily improve your home's efficiency and your utility bills for under $500 and one weekend's worth of work.

8. Update a Bathroom

For about $500 — and as long as you are willing to DIY — you can brighten a bathroom. Plan on investing in a can of paint, a new faucet, and a new light fixture with your $500. The best part is that bathroom remodels (even modest ones) tend to have a high return on investment.

Invest in Yourself

You're a valuable asset, too. Five hundred dollars can go a long way toward improving that asset in mind, body, and soul.

9. Take a Course

Your local community college likely has courses on any number of topics that could help your career or simply stimulate your mind. Expect the tuition for a single course, plus books and associated costs to take pretty much all of your $500. (See also: Ways to Learn New Things Every Day)

10. Hire a Personal Trainer

There are so many great reasons to get in shape — and having a personal trainer help you map out fitness plan and teach you the basics can be the impetus needed to finally get fit.

11. Write Your Will

If you haven't put together a will, you ought to make an appointment with a lawyer to do so. It will ensure that your family is taken care of and that your estate will go where you intend. Find a local lawyer at lawyers.com.

12. Buy a Bike

You can get a decent bicycle for under $500, and work on improving your health and reducing your commuting costs by using it to get to and from work. (Make sure you budget enough to also buy a helmet!)

Knowing That Your Spending Is Just Right

No matter how you choose to invest your $500, remember that you can make responsible money choices even with relatively small amounts of money.

How would you spend $500? Share the wealth in comments!

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This article is from Emily Guy Birken of Wise Bread, an award-winning personal finance and credit card comparison website. Read more great articles from Wise Bread:

How to Prevent a Windfall Money Mistake

Tisha Tolar — Tue, 21 May 2013 09:36:58 +0000

Another week goes by where my numbers didn’t match those of the Powerball. Of course the odds of winning large jackpots like that are quite slim, but a windfall of cash landing in your lap is not unheard of. Windfalls can come from many sources — a lottery winning, a bingo jackpot, a casino score, a work bonus, or an inheritance from a loved one. In many cases, people aren’t especially prepared for receiving a windfall, and as a result they end up making mistakes they live to regret both personally and financially. (See also: If You Won the Lottery, You Would...)

Even if you are not expecting a stranger to show up at your front door with an extra-large check, you should still contemplate the realities of having unexpected cash at your disposal — including tax refunds. Proper management of your personal finances means being prepared for what may come, so take some time to consider how you could use the extra cash responsibly. And who knows, maybe your windfall planning will lead to some insights about how to prioritize your spending and saving with your regular income.

Here is a starter guide on what you should consider when pre-planning your financial strategies involving a windfall of cash.

Eliminate Your Debts

Use your windfall responsibly and leave yourself with a clean slate, debt-wise. Credit card bills, back taxes, loans, and your mortgage debts should be prioritized first.

By eliminating the burdens of your existing debts, you are freeing up cash for your future. You are using your cash in a responsible way and solidifying your overall financial foundation. If there is not enough cash to meet all of your debt demands, make a plan to at least tackle any bills that are past due or charging you the highest interest rates or penalty fees.

Invest in Your Future

Monies remaining after your debts have been dealt with should be allocated towards your future no matter how old you are. Investment strategies should be explored and money can be used to fund your retirement portfolio. If your current retirement savings is at its beginning stages, consider paying a professional financial advisor for initial advice and guidance rather than risking your cash with faulty investments not relative to your financial situation.

Go Play

If your windfall paid all the bills and set your future financially on track, you can feel more confident about spending some of your cash on your "wants." This is the category many people will place as priority after a windfall and as a result, all the cash is gone with very little to show for it. Even when planning to play with some cash, you should prioritize your wants rather than let reckless spending lead to regret. Consider the things that mean the most to you and which will have a positive impact on your life and create memories that will last longer than the money.

Winners Beware

If you have ever watched a news report on the aftermath of a large lotto win, you’ll know that many lucky winners turned out to not be so lucky after all. The pressure that comes with having a lot of money suddenly often ends in heartbreak. There have been several well-known stories of lottery winners who have lost their money and even their lives. Supposed loved ones come out of the woodwork and endless calls from everyone asking for a piece of the pie can quickly turn good fortune into disaster. If you come into a large inheritance or win a large cash award, do nothing until you have secured an attorney and hired a reputable financial advisor.

Stick to your plans for prioritizing your money matters and always remember to be grateful for what you already have rather than focus on what you don’t have.

Have you made plans to spend any windfalls that may come your way? What are they?

This article is from Tisha Tolar of Wise Bread, an award-winning personal finance and credit card comparison website. Read more great articles from Wise Bread:

8 More Smart Things to Do With Your Tax Refund

Mikey Rox — Tue, 17 Apr 2012 10:24:08 +0000

According to the IRS, the average tax refund for the 2012 filing season is $2,899. Although that amount is nearly $100 less than we received in 2011, it’s still nothing to shake a stick at.

Who couldn’t use $3,000, right? But in order for that fast cash to make a difference, you must use it wisely.

Before you get too excited and start burning through a check you don’t even have yet, consider these responsible ways — an extension of last year's post on 8 Smart Things to Do With Your Tax Refund — to help manage your personalized stimulus package. (See also: What If I Skip My Taxes This Year?)

1. Green Home Improvements

We're always fixing little things around the house — a squeaky door, a leaky faucet, that light bulb that always burns out — but not many of us think of the bigger picture when it comes to home improvements. When you receive your refund this year, concentrate on the long-term sustainability of your home instead of the quick fixes. Upgrading to energy-efficient appliances, installing solar panels, and building a garden are all great ways to add value to your property while preparing it for the future. The money you'll start saving on heating, cooling, and grocery bills won't hurt either. Don’t forget to stretch your dollar even more by DIYing the improvements (you do not need to hire someone to plant tomatoes in your back yard!) and searching for the best prices possible on eco-friendly supplies.

2. School Loans

On one of the last days of class at the end of my senior year in college, I remember one of my professors asking us to reflect on the time and money we spent on our education. He asked us if we would have done it all over again given the circumstances. Emphatically, I said yes! That is, until I got the bill. I’m being facetious, of course — I wouldn’t trade my college experience for anything — but I wouldn't be opposed to a generous benefactor (anyone out there?) paying off my loans; despite the financial aid I received, the cost was still unbelievable. Alas, until the day comes when a rich person who’s put me in their will kicks it, I have to send out a check every month to avoid financial ruin. Thus, I take every chance I get to send the bank extra money in order to pay off my debt off sooner — and so should you.

3. Big-Ticket Buys

One of the great parts of a windfall payday like a tax refund is that you can finally afford big-ticket items. That doesn’t mean you should book yourself an all-expenses paid vacation, however. Use this opportunity to pick up an expensive item that you need around the house, like a new vacuum cleaner, washer and dryer, or computer. There's nothing wrong with dropping decent coin on something that will somehow make your life a little easier. If you're a small business owner buying items you'll use for work, keep the receipt. Next year that purchase will qualify as a deduction, so you definitely don't want to miss out on that.

4. Credit Card Debt

We all know that credit cards are a no-no, but sometimes they’re a necessary evil when we’re in a bind. If you’ve racked up the charges on your plastic this past year, by all means try to eliminate that debt. By consistently brushing off what you owe, you’re incurring late fees that are driving up the amount you’re required to pay back while also hurting your credit score, which can affect your ability to buy a home, car, or anything else for which you’ll need a loan. Just pay it off and be done with it — if only so your phone will stop ringing.

5. Doomsday Preparations

I know some of you are going to laugh at this, brush it off, and call me a kook — but you'll be sorry when the zombie apocalypse begins and you're not prepared. That's a bit tongue-in-cheek, of course, but really, how prepared are you for disasters? The walking dead aside, crisis can strike at any moment, whether it be from Mother Nature or man made, and it's not a bad idea to at least pick up the essential survival tools that one needs to make it through a week or so inside the home (or, worse, on foot) without running water, the ability to find fresh foods, or access to technology. My go-to survival-tool source is Ready America. Its prepacked bags contain everything you'll need to stay alive at an affordable price. You can thank me for the tip when we get to the zombie refugee camp.

6. Life’s Necessities

Like with those school loans, it’s always beneficial when you can send in extra cash on whatever outstanding debts you have (such as a car loan or mortgage). But car payments and mortgages notwithstanding, there are plenty more of life's necessities that need TLC — tender, loving cash. If you're on the hunt for a new job, don't be afraid to splurge on an interview outfit that makes you look like you mean business; the Shop It to Me blog recently published helpful advice from frugal fashionistas that will have you looking your best without going broke. For those of you with kids, well, they always need money for something; there's no time like the present to stash a bit away for a rainy day.

7. Cell Phone Upgrade

This may seem like a frivolous purchase — and in some regards it is — but a cell phone upgrade isn’t all for pleasure. Because of my iPhone, I’m able to get infinitely more work done while I’m on the go than I would if I had one of the ancient models I used to have (remember the Motorola Razr? So primitive in hindsight). I can check and respond to e-mails, start writing new posts in the Notes, and plan my meetings, all which give me more time to concentrate when I’m back in the office. Plus, smartphones have an excellent resale value. Since I switched to an iPhone upon its launch, I have always sold the previous model for the price I pay for the latest version when I upgrade. Zero money out of pocket is my favorite kind of buy.

8. Put It Into Savings

Trust me, I know that saving your tax refund and letting it sit in an invisible vault isn’t as satisfying as handing over dead presidents to a bartender in a tropical locale, but your self-control will pay off in the long run. To make yourself feel better about your very-adult-but-no-fun-at-all decision, assign the money you're putting in the savings account toward something tangible. Maybe it's a new car, a down payment on a home, or another large purchase that will improve your life. When you have a goal to reach and a reason to send that money someplace you can't see it, you feel better in the short term about how being responsible totally sucks sometimes.

Tell me — what do you plan to do with your tax refund? Make it good, and let me know in the comments below.

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This article is from Mikey Rox of Wise Bread, an award-winning personal finance and credit card comparison website. Read more great articles from Wise Bread:

Selling Your Life Insurance Policy for Cold, Hard Cash

Paul Michael — Fri, 04 Feb 2011 14:00:09 +0000

Depending on your age, your health, and several other factors, your current life insurance policy could be worth a lot of money to someone else. And believe it or not, people are cashing in on this new form of equity. Life insurance speculation seems morbid, but it’s very real and can be lucrative to both parties.

First, What’s This All About?

Well, most of us have life insurance policies. They are a monthly expense that we feel necessary because we don’t want our loved ones to be financially burdened if we die. (See also: How (and Why) to Buy Life Insurance)

But when we reach a certain age and our children (and even grandchildren) are all grown up, the life insurance policy we have may be something we’d like to cash in. It could also be something you want access to if you have contracted a terminal illness and have only a short amount of time to live. Whether it’s for medical bills, travel, or just wanting to enjoy your final days with some extra money, having access to a large, lump-sum of cash is an option many people in this situation would like.

Whatever their reasons, the option is there for many people to cash out their life insurance policies for less than they're worth. The holder of the policy gets the cash, someone else takes over the payments, and the life insurance company pays out less than face value on the policy — everyone's a winner.

The Numbers Nitty-Gritty

So if you’re thinking about cancelling your life insurance policy, don’t. Not just yet. Because all of the money you’ve put into that policy over the years can be turned into a huge lump sum for you — as much as 80% of the total face value of your actual life insurance policy. If you have a $2 million policy (which is common these days, considering you need 20 times your annual salary to cover your loved ones) that equates to as much as $1.6 million. That’s a whole lot better than just ripping up the policy and walking away.

Check for Accelerated Death Benefits

First, you can check to see if your policy allows you to collect “accelerated death benefits.” Not all of them do, but if your policy has that option and you have less than 24 months or less left to live, you can get a check for a huge percentage of your insurance policy’s face value. Not only that, but you no longer have to pay premiums. It’s also good for the insurance company because they are saving money on the full payout they’d have to issue in less than a few years time.

If this applies to you, or someone you know, make sure you explore this option.

Selling the Policy to a Third Party

If you discover that you have no “accelerated death benefits” option, you are by no means out of luck. Now you can explore an option that can be just as lucrative. The term you need to know here is “viatical settlement.” In a nutshell, here’s how it works according to Wisconsin's Department of Financial Institutions:

Typically, the person or viatical settlement company acquiring the life insurance policy death benefit pays the viator a discounted amount of the actual death benefit, and becomes the irrevocable beneficiary of the life insurance policy, receiving the full amount of the death benefit upon the death of the viator. Increasingly, business firms are buying life insurance policies of the terminally ill and re-selling them at marked-up prices as investments.

So your life insurance policy becomes an investment to someone else. You collect a chunk of money based on the face value of your policy, the third party pays your insurance premiums and, when you die, they collect the full face value of the policy.

The Moral Implications

This is where things get murky. If people are dying and want the cash, that’s their call. But think about this for a second. With insurance, neither party has a vested interest in someone’s death. The person with the policy (usually) doesn’t want to die, and the insurer definitely does not want that person to die.

But when you sell that life insurance policy, things get very different. Now there’s an entity out there, somewhere, that will absolutely profit from the death of the person who signed over their life insurance policy. And the quicker that person dies, the better. It’s grim, but it’s true. What’s more, that third party could decide they don’t want to hang around to collect on the deal and sell it off for a slight profit. Who knows where that life insurance policy could end up.

It’s quite possible that shady companies that operate like mafia loan sharks could scoop up these policies. What will they do to make sure they collect on the full amounts? Would you feel safe knowing that someone out there wants you dead? After all, you may sell your policy when you’re 75 and continue to live a good life for another 20 years. That’s a long time for anyone to wait for a payday.

Of course, this is taking the idea to extremes, but it’s worth considering.

The big question is, would you sell a $2 million life insurance policy for, say, $1 million in cash? Would you do it if you had just 24 months to live? Would you sell it when you reached the ripe old age of 70, or even 80? Or is this money something you would rather leave to your family?

This article is from Paul Michael of Wise Bread, an award-winning personal finance and credit card comparison website. Read more great articles from Wise Bread:

Hoopde for sale. Starting price - $500. Winning bid - $226,521.

Paul Michael — Wed, 19 Nov 2008 18:25:25 +0000

I love stories like this. It gives me hope that one day, something “worthless” sitting in my garage will instantly fill up my daughters’ college funds. In this case, the seemingly worthless item was a rusty bucket of bolts called a 1963 Pontiac Le Mans Tempest. When I saw the pictures, I was surprised at the high starting bid of $500. Imagine how the owner felt when it netted him almost a quarter of a million dollars.

For those of you unfamiliar with the term, Urban Dictionary describes a hoopde (or hoopdie) as: A busted up car, usually very rusty, dented, with broken headlights, bumpers and/or doors; any junk car that can be obtained for less then $1000. And as you can see by the pictures below, this one certainly fulfills all of those criteria. It has no motor, the bodywork is mostly rust and the trunk doesn’t even open. What would you pay for it?

However, as Autoblog recently reported, this was no ordinary car.

The car's Plexiglas windows, unusual suspension setup and a dash plate bearing the name of a racetrack tipped the owner to its racing history. But what he didn't know is that the car is one of only six 1963 Pontiac LeMans Tempest Super Duty coupes ever made. Hemmings recently did a story on the rare cars in which they listed all ever built. This one looks to have been driven by Stan Antlocer and was the fastest drag car in 1963 before disappearing.

Over the nine days the car was up on eBay, things went from good to great to unbelievable. Clearly this was something way beyond the expectations of the owner. It’s reported that he was offered a buy-it-now offer of $160,000, but turned it down because of, get this, fears of negative feedback! Would you care for that kind of money?

With only seven minutes until the close of the auction, the tally stood at $95k. But when it was all over, the grand total was a whopping $226,521. That’s over $66k more than the firm offer he had turned down. In this economy, that kind of windfall is something of a dream come true.

Stories like this are rare, but they do happen. And that means we all need to be studious before we have a garage sale or sell something on eBay or Craigslist. Personally, if I had inherited that crappy looking car, I would have been overjoyed with $1000 for it. More fool me. But we may all have hidden treasures right under our noses.

Take that old, dusty painting stuck in the back of the closet or basement. Most of us have one, sometimes handed down by an aging relative that we took graciously so as not to hurt their feelings. It is most likely just an old painting. But it may be a masterpiece, as The Antiques Roadshow has so often highlighted .

And an old weaving...

Old watches, ornaments, papers, books, you name it, sometimes there really is a treasure in the trash. So look, think and maybe do a little research. If you’re not sure of an item’s value, check it out. A little of your time could turn into a whole lot of money.

This article is from Paul Michael of Wise Bread, an award-winning personal finance and credit card comparison website. Read more great articles from Wise Bread:

Creating an artificial windfall generator

Philip Brewer — Mon, 01 Oct 2007 10:20:06 +0000

Everybody enjoys getting a windfall. One of the attractions of the lottery (besides the infinitesimal chance that you might win a life-changingly huge amount) is that the smaller winning tickets bring little, irregularly spaced windfalls. In fact, some lotteries are deliberately set up to work like this.

Back in the mid-1980s I spent a few weeks working in Germany. At the office where I worked, most of the employees kicked a little money into a pool and bought a ticket in their state lottery. Because my familiarity was with the sort of lotteries most US states have, this seemed like a terrible idea to me, but according to them, this lottery was different from what I was used to.

One difference, they explained, was that a single ticket has a lifetime of several weeks. Each week there was a drawing with bigger and bigger prizes. Winning one of the early prizes was nice, but a mixed blessing because once you won a prize your ticket was out of the running for later prizes.

A bigger difference, though, was that the sum of the prizes was nearly as large as the price of all the tickets--the lottery agent made its money on the interest earned between the ticket sale and the awarding of the big prizes a few weeks later. Unlike the US state lotteries, where you're lucky if the payoff reaches 50 cents on the dollar, this lottery paid out very nearly 100 cents on the dollar.

Another difference was that the tickets cost quite a bit--enough that an ordinary person wouldn't likely buy one. For someone who wasn't wealthy it pretty much had to be a group purchase or a very occasional fling (not a weekly--or daily--expense the way it is for some pitiable people in the US). My coworkers each chipped in one mark a week (today's US equivalent might be fifty cents or a bit more), there were ten or fifteen of them, and I think they only bought one or two tickets every six weeks.

The tickets were not purchased with an eye to winning the big prize. (The odds of that were no bigger than in a US lottery). However, they won one of the smaller prizes pretty often--every eight or ten months on average. Whenever they won, they had a party. If they won one of the small prizes it was a small party--the winnings paid for beer and snacks. If they won one of the bigger prizes it was a fancy party with catered food and good wine.

Once they explained it to me, I realized that they were describing an artificial windfall generator. They could have done almost the same thing by each putting a mark a week into a common fund and then having a party every year, but that wouldn't have been as much fun. This way the party was different every time--sometimes bigger, sometimes smaller; sometimes in the spring, sometimes in the fall; sometimes one right after another, other times with a year-long gap.

You could, in fact, do exactly the same thing, with a little discipline. Create your artificial windfall generator this way:

Open a bank account
Every week deposit $1 (or $10 or $100, depending on the sort of windfall you want)
Ever week roll two dice one time. If they come up double-sixes, you win! Throw a party with the money in the account! (Or do whatever it is you like to do with a windfall.)

On average, two dice will come up double-sixes once out of every 36 rolls, so you'll be throwing your party every eight or nine months on average and you'll have $36 (or $360, or $3600) to throw it with. (A bit more than that, actually, because you get to keep the interest instead of letting the lottery agent keep it.)

Of course you can tweak all these variables. Do you think something closer to $100 would let you throw a much better party than $36? Then put in $2.78 instead of a dollar every week. Do you think your windfall would be more special if it only came every couple of years? Then roll three dice and call it a win if they come up triple-fives or triple-sixes. (There are 216 ways for three dice to come up. If two of those ways are wins then you'll get a win every 108 weeks on average.)

As I explained in my post last week "It's all your money," I don't vary my spending according to windfalls. If I want to throw a big party every couple of years I just budget for it and then decide when I want to throw it. But if windfalls work for you--and if you can discipline yourself to keep your hands off the money in the meantime--you can arrange to have windfalls just like an occasional small win in the lottery at whatever rate suites you. (Arranging to have a payoff like a big win in the lottery takes investing a large fraction of your income for most of your life, but is also generally doable, if you live frugally enough--and live long enough.)

This article is from Philip Brewer of Wise Bread, an award-winning personal finance and credit card comparison website. Read more great articles from Wise Bread:

It's all your money

Philip Brewer — Wed, 26 Sep 2007 23:02:24 +0000

Sometimes you get a windfall--a bonus, an award or reward, a gift, a long-forgotten loan unexpectedly repaid. When that happens to you, do you use the money to make a special purchase? Let me suggest an alternate way of thinking about it: It's all your money.

Spend according to your budget

Whenever I tell people about some money that I've received through any means other than a regular job, they always ask, "So, how are you going to spend it?" To me, the question is just weird. My spending is determined by my budget. It has almost nothing to do with how I got the money.

I say "almost" because although my income doesn't directly affect my spending, it does affect my budget. If my income goes up (and I think it'll stay up), I might well decide to raise my standard of living a bit. And if I got a windfall so large that it entirely changed my financial situation--a winning lottery ticket, let's say, or a major inheritance--then I'm sure I'd adjust my budget based on what my improved circumstances would allow.

In general, though, money that I get one way is just like money I get any other way.

There is one case where I make an explicit exception: monetary gifts from friends and family. When someone gives me cash or a check, I always spend the money on something in particular and tell them what it was in a thank-you note. I think it's simply polite to let someone know how their gift made your life better. (Also, doing this well--buying yourself something that shows that you understand and respect the values of the person who gave you the money--makes it quite a bit more likely that you'll receive additional monetary gifts in the future.) Even in this situation, though, I tend to buy things that were already in my budget; I just accelerate the purchase a bit.

Your cash is your money too

Related to this is spending money differently if you've got cash in your pocket. There are a lot of people who say they spend differently if they're spending cash than if they're using a credit or debit card. Oddly, some say they spend more if they're spending cash while others say they spend less.

Some people say that they'll just spend whatever cash they have, making purchases that they'd never make if they had to pull out a credit or debit card. Other people say that seeing the amount of cash in their wallet dwindle gives them a very clear sense of how much money they're spending, whereas whatever they put on their credit or debit card is somehow invisible until they actually get the bill (at which point they're shocked at what they'd spent).

I say: It's all your money.

Not a matter of discipline

The insight that "it's all your money" is key to making your budget work for you.

Note that this has nothing to do with being disciplined about following your budget. Your budget is yours and you're free to deviate from it anytime you want--but when you do, whatever it is that you're getting comes at the cost of other items in your budget. If that's what you want to do, then maybe your budget was wrong in the first place. Or maybe your budget was right and you'll regret the purchase in the morning. Only you know that, and maybe it'll be some time before you know for sure.

However, when you treat some of your money as different from the rest, you fool yourself into thinking that there's no trade-off--that you can get some unbudgeted item without affecting your budget. All you really get, though, is a budget that's less useful.

An example by analogy

So many people seem to think that the question "So, how are you going to spend that money?" is a reasonable question--and it seems so weird to me--that I've been driven to coming up with an analogy that might help people understand how I see things:

You're at a restaurant. The waiter is coming by regularly and refilling your water glass, but you're thirsty and the waiter isn't quite keeping up. Then the restaurant manager comes over and tops off your glass--you've just had a water windfall. Now a guy at the next table nods at your glass and says, "So, how are you going to drink that extra water?"

If you'd have trouble answering that question, then maybe you understand how I feel when people ask how I'm going to spend my windfall--I'm going to spend it just like I spend my other money, because it's all my money.

This article is from Philip Brewer of Wise Bread, an award-winning personal finance and credit card comparison website. Read more great articles from Wise Bread: