Does a windfall cause you to overspend?

by Rocket Finance

Do you lose track of “un-budgeted” income? Sometimes our plans for extra money don’t add up. When we anticipate a tax refund or a stimulus rebate or a job bonus or other side income, we start to spend it before it actually arrives – and many times the math does not come out right. Let me give you a hypothetical example:

In January, you find out that you will receive a $1,200 stimulus rebate check at the end of May. Your current budget is balanced and you know that if you stick to your plan, the $1,200 will not be needed by regular commitments. So, that night, you decide to take the family out to eat at a nice restaurant – normally you can’t afford it, but you have an extra $1,200 on the way. What’s $75 when compared to $1,200?

The furniture set in your living room is second hand and does not coordinate quite as well as your wife wishes. You find a nice looking couch/chair set for the reasonable price of $300, but while you are in the store, you notice a much nicer set for $600. Why not purchase something a little better? You have been promised an extra $1,200 this year. Why not live a little? Now you are no longer embarrassed by the furniture when company comes to dinner and you still have $525 for your emergency fund.

On several occasions, you are too lazy to pack a lunch for work and your coworkers always eat out and restaurant food tastes so good. . . and ordering from a menu is so convenient . . . and the stimulus check is on the way. You succumb to temptation seven times in five months, plus you pick up the check twice – it is extra money anyway, right? 150 bucks.

You decide to take the family away for a little two-day, weekend vacation. Normally, you would try to stay with friends or family, but a hotel sounds so nice, besides, you can afford it this year. And while you normally pack a cooler full of food and make the family eat the hotel continental breakfast, you choose to treat everybody by eating out for almost every meal. Hotel, gas, food, and entertainment set you back $400.

Your stimulus package is now worth a negative $25 at the beginning of May. Not too bad, but here is where things get interesting:

You start to forget about the meals and furniture and vacation on which you spent money over the last five months. All those little extras fade into distant memory and you continue to spend the money from the anticipated windfall. You don’t have a written record of when you spent “stimulus” money and every time you come up against an extra expense, you use the anticipated surplus as justification for further spending. When the stimulus arrives, it cannot be applied to debt or an emergency fund. It is simply absorbed by the family budget and you wonder where it all went.

Here are some suggestions for dealing with a windfall:

  1. Don’t spend it before you get it. Discipline and focus are needed to pull this off, but don’t spend the money before it is in the bank. Relax, they are making new living room sets every day.
  2. Write down your plan for the money.
  3. If you must spend it before you get it – record your purchase and reduce the coming windfall accordingly. For instance, if you anticipate a $50 credit card bonus next week and you justify lunch at Wendy’s because of that bonus – subtract the cost of the food from the bonus immediately. You are spending away your chance to get ahead.
  4. The best use of a windfall is to reduce debt or to increase an emergency fund.
  5. Never use a coming windfall as justification for unnecessary spending.

Remember that a windfall does not have to be spent. If you survived life without a flat screen television before the windfall, you can probably survive without the television after getting the check.

Have you ever spent extra money “twice”? I have.

  1. 7 Responses to “Does a windfall cause you to overspend?”

  2. By Kacie on Jun 30, 2008 | Reply

    This is an excellent point, and you’ve illustrated it well.

    Our $1200 went straight into our emergency fund, and I like to think we didn’t “spend” it in other areas.

    I hope I can be disciplined the next time we get a windfall!

  3. By Philip on Jul 1, 2008 | Reply

    This is exactly how the government wanted people to start thinking, even those that promised it was paying off bills and going into savings. They figured it would still get spent.

  4. By Christian Finances on Jul 3, 2008 | Reply

    Yep, I overspend when I don’t budget for things like these – it seems to be human nature – hence the reason for budgeting everything.

    The same thing happens with my time – if I have a whole day to do 3 things, some how the whole day just seems to go by and often I don’t get the 3 things done. But when I have 2 hours to get the 3 things done and I plan it out, it gets done… Go figure 😉

  5. By rocketc on Jul 3, 2008 | Reply

    Yes, the tyranny of the immediate. I know very few people who use every moment wisely.

    and even fewer of them are bloggers. 🙂

  6. By Jenny on Jul 5, 2008 | Reply

    Oh yeah, I have. Like every single time! Thanks for a great post. I think I’ll print it and stick it on the fridge.

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