Thursday, February 28, 2008

Why unexpected money throws me off kilter

My friend W. does not understand when I get upset at receiving unexpected money. When my boss called me into a meeting a few months ago and informed me I would have a bonus on my next paycheck (to be direct deposited the next day), I was stunned. I thanked my supervisor as she is quite generous with spot bonuses, but then I had to deal with the money.

I believe in planning my finances and knowing how much I will receive and where it will go each and every month. When I get a windfall whether it is $20 or $2,000, my mind freezes and I get flustered. Now, most people would get excited to receive a nice bonus. Oh what they could imagine doing with it! Frugal pursuit starts thinking "S***! Now what do I do?" Unexpected money scrambles my brain because I am not prepared to deal with it.

If I know about the money before I get it, my equanimity remains. For example, I knew I was getting $776 from my federal tax refund and $675 from my state income tax refund. So before the money was direct deposited in my account, I calmly considered how to spend the money and created a plan. No muss, no fuss even if the numbers were higher than I anticipated before filing my tax returns.

It took me some time to realize that my poor reaction was due to a lack of planning for unexpected windfalls. So, Frugal pursuit took a deep breath and then sat down with her spending plan, her various savings accounts and her Roth IRA and considered what to do with the money. A few ideas resulted:

Fund the Roth IRA. This is an easy one to consider. My financial advisor told me to max out my retirement contributions for this and windfalls could help fund this. However, I am on track to max out my 2007 contributions and by this time next year, may max out the 2008 funding limit. While contributing to the Roth is an option, it is not an immediate one.

Save the money. With the Fed rate cuts, online savings and CD rates are not fantastic, but the yield is greater than standard savings accounts (0.75% versus 3.4% in two of my accounts). It is easy enough to deposit the money into savings and add to the emergency fund. However, there is also my auto fund and found money account to consider. Which do I distribute it to? In practice, I place the majority of a bonus in regular savings and smaller amounts in auto or found money accounts. The found money account still leaves me feeling ambivalent since I have no purpose for the account other than to see how the various bits of money add up over time, but it can be considered an extra savings cushion.

Spend the money. In many ways, this is the easiest to do. As a homeowner, there is always something I can buy to improve my home. I am as subject to consumerism as the next person especially as I have not cut television out of my life. A nice new iPod nano or new DVD or piece of clothing still has its attractions. Generally, I limit the amount of money I spend from windfalls. If it is a small amount like $20, I might splurge on eating out, but most money is saved because I always think "what if". I am single and support myself without a partner to ease the pain if money is tight or I lose my job.

My current plan for windfalls: save the money. I may debate on which account receives the money, but leaving the money in an interest-bearing account does not hurt and if I have an unexpected expense or can contribute more to retirement savings, I have the means to do so without finding room in my spending plan. With a method to handle bonuses and other unexpected bits of money, my blood pressure should stay low and my friend W. is less likely to make fun of me for panicking in the face of a surprise bonus.

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