An unexpected windfall recently came my way, and I realized right away that I had to avoid the urge to splurge.
Therefore, much of the newfound money is going toward paying off credit card debt, not toward the latest Apple iPad or a shopping spree at Banana Republic (my favorite clothing store).
While my windfall is not a tax refund (I actually owe money to the IRS this year), a recent survey about tax refunds indicates what Americans do with their cash from Uncle Sam. Almost half plan to use their tax refund to boost savings, the National Retail Federation found.
Better move: Save less, pay down more debt
Since the U.S. savings rate is horribly low, it’s nice to see that Americans are thinking about the future, not the present, when it comes to their tax refunds.
On the flip side, just 35 percent of those surveyed say they’ll put their refund toward reducing debt.
What would be better to see would be nearly half of those anticipating a tax refund allocating that money to lower their debt, and 35 percent depositing the windfall into a savings account.
Why? Because the meager interest you’ll earn with a savings account will be dwarfed by the interest rate you’re paying on your credit cards or other debt.
Who knew? Stock options will help pay off my cards
Now, let me get back to my own windfall and how I’ve decided to divvy up the money.
From the spring of 2013 to the fall of 2015, I worked at an Austin, Texas, company called SpareFoot. The company operates an online marketplace where consumers can shop for self-storage space.
As part of my compensation package, I received stock options. When I left SpareFoot, those options enabled me to buy shares in SpareFoot at a bargain price.
On March 29, I received an email from co-founder and CEO Chuck Gordon notifying me that SpareFoot was being acquired by a private equity firm in Boston.
The email to former employees who own stock informed us that our stock was being purchased at a price that was comfortably above what I paid for the shares back in 2015.
As a result, I’m winding up with a nice stash of cash. (I’m not going to tell you how much.)
Having visited a financial planner in 2015, I instantly banished thoughts of transforming into a big spender with this stash of cash. Instead, I mapped out a plan to sensibly spend the money.
How I’ll divvy up my financial windfall
After reviewing my debts and crunching the numbers in an uncomplicated spreadsheet, I settled on this strategy:
25 percent will go into my travel fund to cover trips I’m taking later this year. This lets me cut the number of travel expenses that I’ll rack up on my credit cards.
15 percent will go toward paying the capital gains tax on the stock sale.
13 percent will go toward the down payment on a townhouse I’m buying.
13 percent will go toward a scholarship fund I’m setting up in my maternal grandfather’s name at his alma mater, Fort Hays State University in Hays, Kansas.
11 percent will go toward paying off my American Express SimplyCash Plus card.
10 percent will go toward paying off my American Express Platinum credit card.
5 percent will go toward paying off my Chase United MileagePlus Club card.
5 percent will go toward paying off my Capital One Quicksilver.
3 percent will go toward paying this year’s income tax bill.
Now that this plan is in written form, it’s much easier for me to stick to it — and to avoid throwing away money on stuff I don’t need.
(The voice of my financially wise mother, who died in 2015, just popped into my head. She’d be proud that I’ve adopted a prudent approach to my financial bounty.)
With APRs on the rise, pay down debt now
If you ever find yourself blessed by money you hadn’t expected, I highly recommend using that cash to reduce or eliminate credit card balances and other types of debt that carry interest.
You’ll be better off doing that than rushing to the nearest Best Buy and buying a high-tech TV and a ton of gadgets.
Given the annual percentage rates (APRs) on the four credit cards I’m paying off, I consider my windfall plan a smart investment. It might even be as smart as the investment I made in buying the SpareFoot stock.
See related: Guide to rising credit card interest rates, 8 things you must know about credit card debt, Would you spend or save a small windfall?
Source : Creditcards
