What You Should Really Do With That Unexpected Money

by Justin Weinger on August 19, 2011

This afternoon, my wife and I got a check from our mortgage company for overpayment of our escrow account.  Since we weren’t expecting the money, it was certainly a nice surprise, and got us talking about what we might like to do with the money.

what you should do with extra money, pay down debt, contribute more to your mortgage, contribute to your rainy day fund, build a nest egg

It wasn't exactly raining money...

Getting money you weren’t expecting, like in our case, or getting more than you were expecting, for example, your birthday, is always a great feeling.  Having a big check or a giant stack of cash in your wallet has a funny way of putting a spring in  your step and daydreams in your mind of what you’re going to buy with the loot.

So, should you take these good feeling all the way to Best Buy and get that big screen TV you’ve had your eye on?  Or, should you be boring and do something frugal with the money instead?

As you’ve probably already guessed, I’m going to argue that you should do something that involves frugality.

Let’s assume you received a $500 “windfall” and you’re debating between buying a PS3 and two games, or doing something frugal with the cash.

Pay Down High Interest Consumer Debt

what you should do with extra money, pay down debt, contribute more to your mortgage, contribute to your rainy day fund, build a nest egg

Paying down high interest debt should be high on your priority list.

This is an absolute no-brainer.  By contributing the unexpected money toward paying down high interest consumer debt, it’s possible you could ultimately save yourself hundreds, if not thousands of dollars in interest charges.

For example, let’s make it easy and say you have $500 in outstanding credit card debt on which you were paying 18% annual interest.

If you were to wipe out the debt, obviously, you would incur $0 in additional interest charges.  However, if you were to blow the money elsewhere and then continue to make just the monthly minimum payments, you would ultimately incur nearly $200 in additional interest charges!

Blow the money and lose an extra $200, or pay off the debt and lose nothing else?  Again, seems like an absolute no-brainer.

Contribute to Your Emergency/Rainy Day Fund

If you’ve already paid down all of your high interest consumer debt, but don’t have much in savings for an emergency, it would be a very wise move to put the unexpected cash there.

As you’ve read here before, 64% of Americans don’t have enough money in savings to cover a $1,000 emergency expense, so if you’re in that boat – and based on statistics, there’s a good chance you are – stashing away that $500 will put you half way there.  And considering $1,000 expenses really aren’t all that uncommon, wouldn’t you rather have something other than a video game system to fall back on?

Plus, once we get back into a higher interest environment – which, according to the Fed will likely be years from now – that $500 will make you even more money simply by just sitting in a bank account.

Pay Off Other Debt

Once you’ve paid off any high interest consumer debt and have enough in savings that you can cover three to six months worth of living expenses, it might be worth contributing that extra $500 towards more “acceptable” debt – things like mortgages, student loans, car loans, etc.

While a one-time $500 payment won’t do much, especially over a the life of a loan like a 30-year mortgage, making a habit of contributing these surprise payments will make a big difference.

For example, if you had a $200,000 30-year fixed rate mortgage at 5%, and paid an extra $50 per month towards your mortgage (only $600 per year), you would pay off your loan nearly three years early and, here’s the kicker, you’d save over $20,000 in interest costs!  That’s absolutely incredible!

Do Something Memorable

Okay, so you don’t have high interest consumer debt, you’ve got an emergency fund, and you don’t need to pay down a mortgage or other debt.

Now what?

Don’t go out and blow the money on the PS3, like in the scenario I outlined above.  Go out and spend that money on something memorable instead!  Go whitewater rafting, or get a bunch of friends together and rent out a beach house for a week.  Maybe do something nuts like skydiving.

Just don’t blow it on something that’s going to give you buyer’s remorse two weeks from now.

So, those are my suggestions for what you should do with unexpected money.  Hopefully you’re fortunate enough to need to reference this post in the very near future!

What do you think about this post?  Leave your comments below and, as always, please share this post using the social bookmarking buttons below – especially Facebook and Twitter!

Share

{ 4 comments }

EricF August 19, 2011 at 12:52 pm

Add it to an investment portfolio?

Brian Carr August 19, 2011 at 1:37 pm

That’s always a good option too. I guess I just sort of rolled that idea up into the emergency fund.

Niki August 19, 2011 at 1:59 pm

While I do like and agree with your suggestion, I am not sure it is applies to everyone. We have kids and family entertainment is extremely important. Having something ‘at home’ like a PS3 can also be a money saver. We are not particularly a video game family, but we have spent windfalls of money on things you would find equally disagreeable. We live near an amusement park and one year we got the annual pass. It was a big expense up front, but saved us on days we didn’t have money and needed something to do. Since entry was already paid for, we could make sandwiches, park nearby and ride our bikes in for free. We really want a pool, but it will be several years before we can afford our $30k dream pool and the kids are young NOW. This year I really had to push to get my husband to agree to spending our tax return on a $800 above ground pool. We could not afford a vacation this year due to his lay off. Having a pool in the back yard gives the kids something already paid for to do each day and saves us money in the end by not having to find other ways to cool off or be entertained. (Bowling, movies… ).

I love to travel and have once in a lifetime experiences, but truth be told $500 won’t get a family of four very far. A PS3, Wii, basketball hoop, bikes or other family gift could give them HOURS/DAYS/YEARS of entertainment. If you use your $500 on something memorable … what will you do to entertain the family the other 51 weeks of the year? In all honestly, I think the PS3 would be the better investment for most families. Plus in a couple of years when the family outgrows it a PS3 can be sold, traded in or donated.

Brian Carr August 19, 2011 at 2:49 pm

Thanks for the comment, Niki!

The PS3 wasn’t meant to be a literal representation of what you shouldn’t buy. It’s a “to each their own” kind of decision. If you think having a PS3, amusement park passes, or whatever is what’s best for you and your family – and you can afford it – by all means, do it. For full disclosure, I own a PS3 and I use it for home entertainment stuff.

Also, I think you’re taking the $500 a bit too literal as well. Both the PS3 and the $500 were meant to be simple examples.

The moral of the story is you should probably pay down high interest consumer loans, then save, then, if you’ve done the first two, do what is best for you or your family.

Previous post:

Next post: