Skip to main content

Cashing in a Windfall

I’ve never won the Powerball.  Never sold a tech business for a bazillion $$.  Never gotten a massive inheritance check.   But I’ve received plenty of windfalls*.  Big, small, and in-between.  Raises, bonuses, asset sales, refinances.  Doesn’t matter – I’ll take the extra cash.

And now, I’ve just received another windfall – the largest to ever come my way.  At work, we sold an asset that I had a large hand in creating, but no ownership.  Real estate deals are a bit unfair that way – you’re either an owner up front, or not.  In this one, I was not.  And this deal crushed it.  Equity returns of 4x in under 4 years.  For us as the developer/sponsor with our waterfall structure, that means returns of 8-9x initial investment.

My bosses made up for me being left out when we sold.  They gave me a surprise bonus that matched my whole annual salary – over $200k.  Geez.  Makes me feel a little guilty for bitching over the years about not being included in that deal.

Having the extra cash from this windfall is awesome, of course.  I could save it, spend it, or give it away.  Unexpected, free money.  What could be better?  All the flexibility in the world.  Let the spending begin…?

Bonus-Fueled Spending Spree

So what did we do with this bonus?

First of all, we let loose a little bit.  I’m a big believer in celebrating the wins.  We called in a babysitter and went out to get a medium-nice dinner.  We’ll also take a night or two away this spring that will be loosely tied to celebrating this windfall.  We tried to keep the celebration in scale with the windfall – a percent or two of the overall surprise income.  But do something we wouldn’t have otherwise done.  And we didn’t want to create recurring expenses.

On the financial side, we made a couple of moves to minimize some taxes.  First, creating a SEP.  Second, some advance-charitable giving.

This income came as a fee to a business entity separate from my W2 income.  Through a SEP, I’m able to contribute up to 25% of my self-employment income.  Max $53,000 less any other 401k contributions.  Since I max my 401k at $18,000- this means $35,000 additional tax deferred savings.

We then contributed $60,000 to a Vanguard donor-advised fund.  This allows us to “pre-give” to charity this year with the accompanying tax deduction.  Since our income will be relatively high, this is a good year to have large charitable gifts (versus either typical working years or early-retirement years).  The money will be invested until we give it to particular charities.  To be clear, the money is gone for our purposes.  But we are committed to give it anyway, so this was a good option for us.

The rest was effectively invested in bonds.  Except the best way for us to invest in bonds right now is to pay off our home equity line of credit.  We set this up when we bought the new house to bridge us until we sold the old one.  Still waiting on that sale unfortunately…had a contract fall through.  So I see this as an effective yield of 4%.  Pretty good for bonds these days.  And the line is still there.  So if we need it back for whatever reason, we can re-borrow it.

In summary: Maybe $1,000 of “fun” and over $200,000 towards a “saving/giving spree” that only a personal finance nerd could possibly enjoy.

Why Not More Spending?

The “eureka” for my personal finance came a couple of years ago in realizing that I’m allowed to dislocate my expenses from my income.  There are no rules that make me spend everything I make.  For the last several years, when a windfall of any sort comes in (raise, bonus, etc), we’ve only let it affect our income.

Expense decisions are separate, and (mainly) based on a concept of “enough.”  It’s explained very well in the book Your Money or Your Life.  The key for me is that “enough” is different from “more.”  Our expenses still seem to increase over time, but at a rate much less than the 17% annually that we’ve pushed income.  That’s how we have created margin.

Also, I learned all to clearly in 2008-2009 that real estate is a cyclical business.  The sun is shining now, and we’re making hay.  But there are ups and downs in this and every business.  So let windfalls be windfalls.  Enjoy the fruits of your labor.  But don’t create dependency on them; don’t turn them into a drug.

A windfall becomes a drug if I inflate my spending to match it.  As soon as that happens, this year’s windfall becomes next year’s obligation.  Instead of a new car/house/boat, you might as well by chains & shackles, because you’re letting your windfall enslave you.  This is lifestyle inflation at its core.  It’s the reason people don’t get ahead, even with making considerably more dollar bills each decade.

Even one-time windfalls (bonuses, inheritances) can set this trap.  You use a bonus on a larger-than-planned downpayment – you get stuck with higher-than-planned mortgage & utilities.  You use a bonus to join the country club – you pay hundreds a month in ongoing fees.  You buy a bunch of new stuff – you rent a storage unit for the old stuff.

Instead of buying stuff, we use additional income to save towards our future.  Whether it’s early retirement or just flexibility – we can make those decisions later.  And make those decisions in a value-based way, instead of just spending because we have extra cash.

How do I Ever Buy New Stuff Then?

We do buy things.  Just try to not base those purchases on income.  As an example, when we wanted to move houses, we did not rely on a windfall or any upcoming income events.

Kind of corny, but we first made sure we appreciated what we have to avoid feeling like we “have” to have this new thing.  A less stressful mindset: We have a good thing now, but would like this other good thing to match our future life as long as it doesn’t significantly affect our long-term goals.  It was tough to leave that old house.

Then we thought about items we would value in a different house.  In our recent case: one level living, less maintenance, bigger/fenced backyard, good schools, still no mortgage.  Enough of these had built up over the years as our lives changed from closer-to-cool couple/newlyweds to not-even-close-to-cool parents of toddlers.

We aimed for a new house that was only a bit (5-10%) more expensive than our current house.  Lots of frictional costs in moving though, so we did spend money in the move.  Not to mention it has taken a ton longer to sell our house for a handful of unrelated reasons.  But all this was relatively in-line with our expectations to pay for the things we value.

Winning with Windfalls

In general we try to keep costs low enough that our income is not a factor. Certainly our spending level is not dependent on a future raise or bonus.   We aren’t frugality experts, but we try to pay attention on that side of the ledger.  Neither my wife nor I are interested in living anywhere close to paycheck to paycheck.

Through this mentality, we have been able to enjoy the windfalls of our hard work.  Careful to keep them “no strings attached.”  We celebrate the feeling of accomplishment, and extra cash gets turned into assets.  Through this formula, we’ve been able to watch our net worth grow at a very quick pace.


*The expression windfall came from the good fortune of having wind blow fruit from a tree.  Got to love some etymology wrapped into personal finance.



13 thoughts on “Cashing in a Windfall

  1. Congrats on that windfall and not letting lifestyle inflation take place. Wow, keeping one thousand dollars as fun money only is wow, you also said you are donating too, so that’s great to hear about paying it forward.

    As for rising income, that is also been my goal all along, while slowly making efficiencies in expenses, which creates the bigger ‘margin’

    1. Thanks! Yes, only a little spent now. But a lot of it is still fun money…just for another day.

      A good goal. We’re slowly becoming more efficient also. But at least stopping the inflation can lead to this margin – quicker than some might think. Thanks for reading.

  2. I’d say that this is admirable that you received such a windfall and didn’t succumb to lifestyle inflation.
    Congrats to you and your wife.
    I think you did the right thing to actually spend some money to celebrate the win but to also remain aligned with your long term goals.
    Many people winning the lottery wouldn’t be nearly as frugal 😉

    1. Thanks, I appreciate the compliment. Squirreling away money is pretty fun too, once you get the snowball rolling and see the accumulation!

  3. Hey I really like your blog.
    I’m checking it out almost on a daily basis.
    Congratulations with your bonus.

  4. Good on you, I similarly had a 200k windfall from work on top of my normal 200k salary last year. Our family celebration was similarly sized to yours, the money almost all went into savings. Only one year before I received over 800k in inheritance which we also saved almost all of. The combination of saving those two windfalls let me walk away from a big salary but an unpleasant job and retire this year. And life , which was always good, is awesome beyond words now! You are a smart southerner my friend!

    1. Congratulations! The reasons for the windfalls can be very different, but good to hear you put both to work towards long-term life goals – and are happier for it.

Comments are closed.