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Financial windfalls are certainly useful when times are tight, especially this year. As the pandemic continues, the possibility of a third stimulus check and a tax refund means Americans may be coming into some extra cash to help them get back on their feet.
But if you are still employed, can afford your monthly bills and feel comfortable covering your basic needs, now's an appropriate time to devise a strategy for splitting up and using this anticipated "free money" in a way that works for you.
"These unexpected windfalls (keyword: unexpected) provide the perfect opportunity for you to get ahead with your money," says Priya Malani, a founding partner of Stash Wealth, a millennial-focused financial-planning firm. "Don't fall into the 'extra money means more things for me right now' trap."
Instead, be intentional with windfalls just like any budget. Conventional financial advice lays it out pretty clearly with monthly budgets: Spend 80% of your income on your expenses and stash away at least 20% to save for tomorrow. (This is a simplified version of the popular 50/30/20 budgeting rule, which divides your income into 50% spent on your needs, 30% spent on your wants and 20% saved.)
For windfalls, Malani suggests doing a reverse split: 80% of that cash infusion should go toward your long-term financial goals, like saving and debt payoff, and the other 20% is for buying something satisfying in the short-term. That way, you can treat yourself while still looking out for your future self.
Below, CNBC Select breaks down what the 80/20 windfall rule would actually look like with a third stimulus check and tax refund — plus where to put those savings.
First, assess whether you need the upcoming cash infusion for basic needs. For the 80/20 rule to apply, you should have your rent/mortgage payments covered and be confident that you can pay your monthly bills.
If you have the wiggle room, the 80/20 strategy works exactly as it's described.
Here's what the 80/20 rule would look like with a third stimulus check:
While Congress is still debating the exact parameters around a third stimulus check, the two amounts in discussion are $1,400 per person (proposed by President Joe Biden) and $1,000 (proposed by Republican senators).
If it's $1,400, applying the 80/20 rule would mean saving $1,120 and spending $280. If it ends up being $1,000, those numbers go down to saving $800 and spending $200.
Here's what the 80/20 rule would look like with a tax refund:
For those who are banking on receiving both a stimulus check and a tax refund, try to save $3,620 (using the $1,400 stimulus amount) and plan on having nearly a grand ($905) to spend.
The purchases you make are totally up to you: Finally splurge on that ergonomic desk chair so you can work from home in comfort, or treat yourself to some self-care products and cooking supplies to brighten up your winter spent indoors.
If you're finding it hard to stay active in the cold, perhaps you use this money on something more practical like testing out a subscription for an at-home gym membership.
Whatever your purchases may be, stay within budget and take comfort in knowing you've used the majority for long-term financial well-being.
You may want to put the majority of your stimulus/tax return money in a high-yield savings account to top off your emergency fund, Malani says.
Consider depositing that cash into the Ally Online Savings Account, which offers above-average interest rates on all balance tiers, no minimums and zero monthly fees. Notably, Ally's online savings account offers a "buckets" feature, letting you organize your windfall in up to 10 different savings categories, all within this one account. Create a designated fund for a "Future Vacation" and another for "Emergency Savings," for example.
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And if you have two long-term goals? You may also want to split the 80% chunk towards two purposes, like saving and knocking out credit card debt. Most credit card issuers charge interest on your balance daily, so it's worth it in the long-run to pay off your balances when you can.
While debt and saving isn't quite as fun as a new purchase, take comfort in the fact that every financial priority works, in some way, to benefit you: "These are things that are for you...and will benefit you greatly in the long run," Malani says. "And, if it's for you in the long run, you're not giving up anything in the first place."