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Sunday, November 2, 2014

8 Ways to spend on your Windfall

A Windfall can be defined as an unexpected receipt of money that you have received without budgeting them previously. 

The key word here is unexpected because it appears there is no plan what to do with the money and many makes the mistake of wasting them for granted. Consider this for an example:

A tourist had $100 dollars which he treats as an expense for his casino entertainment. He played the Roulette game and placed all his bets on the number "0", having dreamt of the number the previous night. Unexpectedly, the ball drops on the very same number he put his money on and the payout is 42/1, which means he won a total of $4,200 including his original stake. Now, this is a windfall.



Thinking that this windfall is not his money to begin with, he continues playing and ends up losing a couple rounds until he was left with $200. He thought to himself: "Not too bad, I made a 100% return today" and decided to leave the casino.

How many times have we heard of such stories regarding winning a windfall only to end up losing everything because things were unplanned. 

For those who have won a windfall, perhaps there are better ways to utilise them:

1.) Pay off debts (student loans, credit cards, mortgage, etc)

Debts carry interests and there are no better ways than to pay off your high interest debts in order to avoid paying for such charges. A windfall can help you clear all those debts at one go, saving you thousands of interest charges you would have incurred otherwise.

2.) Contribute to Emergency Fund

For those who have not build their emergency fund, this could be time to do so. Having at least 3 to 6 months of living expenses help to buffer for any unexpected costs arising from unemployment or illness.

3.) Top up contributions to Social Security (CPF)

If you have not been keeping up with the rising minimum sum lately, maybe you could set a sum to top up contributions to your CPF. Do note that there is a cap on how much you can voluntarily contribute and claim a deduction on your tax account.

4.) Increase your Investment

Depending on the amount you have won, you could either use the money to invest in real estate or buy stocks that would improve your returns over time depending on your strategy.

5.) Treat your family to dinner or travel

Who says the money you've won can't be spend on treats and luxuries. On the contrary, take this chance to treat your family to a nice dinner or bring them to a nice getaway for some quality family time, without having to worry about the expenses.

6.) Donation

Some of the money could also be used for donation to the poor and needy who needs this money much more than you do. To encourage greater charitable giving in Singapore, you would also be able to claim a deduction up to 2.5 times on your tax account.

7.) Track your health insurance

Living in a country where medical is so costly, run through the insurance you need and engage a professional to advise on your insurance related matters. For those with health related matters, you could use this chance to do a health medical checkup.

8.) Spend on hobbies

Have an interest in a photography class? Or keen to learn on the much awaited korean language? Maybe this could be a time to engage in some your hobbies that you have been wanting to do.
 

In conclusion, a windfall is ultimately your own money to begin with. Even though they came to you unexpected, do not spend them recklessly as if they are not your money. Proper planning could change your life and do justice to what it belongs.



6 comments:

  1. Hi B,

    You're right, the "house money" mentality is very strong. I have succumbed to such situations before, haha. Very hard to quit when you're ahead, especially if you feel like you are on a "hot run"!

    It's like anchoring, but instead of an entry price for a stock, it's the P&L of your winnings. Winning individual games at the casino can be straightforward, but walking away profitable for the day requires more than just skill in the game! Maybe at casino should implement a trailing stop loss discipline? Haha!

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    Replies
    1. Hi GMGH

      Ahh, maybe it's the overconfidence that raises our attitude and mind upwards but failing to adjust the same for the fall.

      The house always win because of the higher probability and the law of large numbers. The human minds get defeated :)

      Delete
  2. Hi B,

    This is like the opposite of the endowment effect and loss aversion. If it's your hard-earned money (i.e. work for 10 hours at a $10/hour job), you will treasure it and more likely make less risky decisions with the money.

    But if it's a windfall, all hell break loose! Probably helps to explain why lottery winners tend to go back to their original state after a few years.

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    Replies
    1. Hi 15Hww

      You are right.

      Working hard for your money makes a whole lot of difference experience than getting them through a windfall. I would not mind getting a windfall though, I have set my mind to be ready in getting them. Pray pray pray...

      Delete
  3. Hey bro, you forgot to include the most important thing - use the windfall to invest in yourself!

    Regards,
    SG Wealth Builder

    ReplyDelete
  4. Hi Gerald

    You are right!!! Human asset is the most important that we need to update.

    ReplyDelete

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