The Windfall Challenge: What Would You Do With $10,000?
It's a popular fantasy: Out of the blue, you receive a lump sum of inheritance cash from a great aunt twice removed.
Fast forward a few months, when you're either lounging on a catamaran in the Caribbean, zipping around town in a bright red convertible -- or kicking back in a French country house for the summer.
But if that happened in real life, would you really be so extravagant?
If you're familiar with the 90/10 rule, you may already know the better way to divvy up a financial windfall -- putting 90 percent of that money toward financial goals, and the remaining 10 percent toward a splurge.
Of course, not everyone has the same visions for a windfall, which is why we asked three people to answer a simple (but loaded) question: What would you do if you unexpectedly came into $10,000?
We chose that amount because it's enough to make a difference in someone's budget -- but not so high that your brain goes straight to purchasing a private jet.
Then we asked Chad Nehring, a certified financial planner with Conceptual Financial Advisors in Appleton, Wisconsin, for his opinion on whether they could stand to make some smarter decisions with that money.
The Small Business Owner Who's Got Big Plans
Who: Natalie Elizabeth Tackett, 44, owner of a painting and restoration business, Bristol, Tennessee.
What I'd Do With a $10,000 Windfall: "My top priority would be to pay off my credit card debt.
"I'm currently in the hole for about $3,500 -- a mix of personal expenses and costs from getting my company off the ground three years ago.
"I'd split the remaining $6,500 between buying a work van or truck (I'd sell my current car to help defray the cost), and on classes to keep my restoration, repair and decorative painting skills fresh.
"Being self-employed is a 24/7 job. I predict my take-home pay will be about $20,000 this year -- roughly five times less than what I was making as a marketing director -- so I'm focused on growing my business.
"That said, my personal expenses are low enough that I still live a good life. I'm not married and I don't have children, so I don't have to support a family. My car is paid off. And I own a charming stone cottage that costs me under $1,000 a month in mortgage payments.
"Unfortunately, my emergency fund isn't too impressive -- several hundred dollars, at best. And I'm sure a financial planner would say I should boost the $10,000 I have in my Roth IRA."
What the financial planner thinks: Nehring agrees that Natalie should first tackle her credit card debt -- but he isn't a fan of commingling personal and business expenses.
"I wouldn't be opposed to having her pay off the personal credit card debt, but the business itself needs to pay the business expenses," he explains.
He suggests that she could start by treating debt repayment as a line item in her company budget, which would help make the business become more self-sustaining.
As for the work vehicle, Nehring advises against using any of the $10,000 for that. Instead, he says it's a better idea to sell her existing car, and buy a used truck or van for the same amount to avoid having to finance a new vehicle.
Nehring also suggests putting savings higher on her priority list -- over continuing education, which could also be a line item in her business budget.
"I'd suggest she put a few thousand into her emergency fund," he says, adding that the remainder can go to the Roth IRA, "so she can get some more retirement accumulation."
The Money-Savvy Soon-to-Be-Dad
Who: Eric Serdar, 25, online marketing specialist, Salt Lake City.
What I'd Do With a $10,000 Windfall: "I like to think that my wife, Des, and I are pretty responsible when it comes to money. We have zero debt aside from our car loan, and saving is our strong suit.
"We have $10,000 in a rainy-day fund -- enough to cover our expenses for at least six months -- but it can never hurt to pad that more, so I'd add $2,000 from the windfall.
"We're currently renting an apartment, but I would love to start building equity in a home. So I would use $3,000 of the windfall to start a down payment fund.
"Both Des and I save for retirement. I've got about $2,000 in my 401(k), and she has about $10,000 in hers -- plus I have another $4,000 in a separate mutual fund.
"But I really don't know much about investing and I'd like to learn more, so I'd put another $4,000 into some type of brokerage account -- maybe take some risk with it for a higher return, since I wouldn't care as much if I lost that money.
"I'd use the final $1,000 on a trip to Disneyland, because we're due to deliver our first child, a girl, very soon. Des loves Disneyland, so it'd be a nice vacation for us."
What the financial planner thinks: Nehring commends Eric's windfall plans -- with just a few small changes.
For starters, he'd ditch the trip to Disneyland.
Instead, Nehring suggests using that $1,000 to start a travel fund for a future vacation, when his child is a little older and can appreciate it more.
"If they're going to go in the next one to two years, I'd suggest keeping that money in either a savings account or a very short-term CD," Nehring says. "If it's a trip five or six years in the offing, then you could maybe take a little more risk with it [by investing it]."
Nehring also lauds Eric's desire to pad his emergency fund and save for a home, but as a beginning investor, he doesn't think Eric needs to resort to complicated investing strategies to help that $4,000 grow.
"A good starting point that's been attractive to investors lately could be target-date funds," says Nehring, a type of mutual fund that readjusts its asset allocation based on a selected time frame, and is often used to help meet a future retirement date. "Barring that, a balanced index fund or mutual fund could work just fine," he says. "[They don't provide] such a significant amount of risk that he could lose it all, but at the same time, the money's not sitting in a savings account," where it would potentially earn less.
Overall, Nehring thinks Eric and Des are on the right track.
"I really like what they've done so far," he says. "They've got a great emergency fund that's probably better than what a lot of their peers have, and they don't have a lot of debt. There are some good things happening here."
The Expat Who's Starting Over Stateside
Who: Johari Murray, 40, language educator, Norwalk, Connecticut.
What I'd Do With a $10,000 Windfall: "My family has spent the last nine years living in Spain, so a $10,000 windfall would help us settle back into life in the U.S.
"My husband, Agustin, is a linguist and former university lecturer, so he's looking for a job in higher education. I ran my own language school in Spain, and am waiting to hear if I'll be teaching in Norwalk's public school system this fall.
"We're staying with friends and family while we transition, and living off savings for the next month or so. We also have about $3,000 in a separate emergency fund, but because our income is uncertain right now, I'd split $1,000 of the windfall between our two checking accounts, so we have an extra cash cushion.
"I'd also put $1,000 each into savings accounts for my two children, ages 9 and 6, so they have some money that can grow for their futures.
"I'd like to invest $6,000, but I'm not sure how. $1,000 could go toward seeding a new educational business project I have in mind, with the rest going toward the markets. I don't actively invest now, so I'd use the windfall as an opportunity to learn.
"Finally, charitable giving is important to me, and I'd love to split $1,000 between my favorite causes, including museums, NPR and PBS."
%VIRTUAL-pullquote-With a lot of the unknowns and uncertainties that they have, this money is best kept completely liquid.%What the financial planner thinks: Between their international move and changes in employment, Johari and her family are dealing with a lot of moving parts -- and Nehring says a windfall could give her some much-needed peace of mind.
"With a lot of the unknowns and uncertainties that they have, this money is best kept completely liquid," he says.
So he'd suggest holding off on investing, charitable giving, and even funneling any of the money toward savings for the kids -- and keeping that windfall as an emergency fund in a basic savings account they can easily access.
The reason, Nehring says, is simple: They don't have income coming in yet, and their current emergency fund is too low to provide enough of a safety net.
"[The money] will earn nothing, but it's going to be there," he adds. "For these folks the idea of just having $10,000 that's liquid and free of any risk is going to be the most important thing."