Tuesday, September 18, 2012

Rule #17 Save/Invest ALL windfalls or bonuses

Windfall: (n.) An unexpected legacy, or other gain.

We use our weekly or monthly paycheques to pay for our day-to-day lifestyle and we live within our means based on that income.  We have a set amount that we save and invest every month - an amount that comes out of our monthly cash-flow.  This is the discipline part of our money plan... However, every spring there is a chance we get a tax refund, I sometimes get a bonus from work, and at some point we may get an inheritance but we dont know when or if that will ever occur.  We don't know how much (if at all) any of these windfalls are going to be, so we never consider them when planning our monthly or yearly budgets.  We essentially treat them as found money.

Have you ever had a one of these sizeable windfalls that you weren't expecting come in?... a significant amount of cash that isn't part of your regular paycheque, and you were faced with the question "what should you do with it?"   Should you use that money to renovate your kitchen?  Buy a new car?  How about a motorcycle? Some people take their bonus and go on big vacations or pay off large credit card debts that they've racked up.  I even know people who spend like crazy at Christmas and then plan on having their tax refund in the spring pay for the credit card bill... Yikes.  But I digress... Assuming you're not breaking my credit card rule, what should you do with such found money?  Should you use it for a one-time consumer purchase or should you put that money towards something that would make you life easier every day to infinity... such as to pay down debt or invest in assets that will continue to send you a cheque for the rest of your life every year?  Ahhh now thats starting to sound like me.

Whenever we have one of these windfalls we apply it to our investment strategy so that we continue to benefit from the windfall for the rest of our lives, through predictable cashflow... usually dividends.  Its sort of like a a shot of adrenaline to our portfolio's cashflow and can make a significant difference over time.  We ALWAYS use bonuses, tax refunds and any other "found money" to further our progress towards financial independence.

Lets assume a quick example of a $10000 windfall from something.... say a bonus at work because your company had a banner year.  Invest that money in a company such as Bell Canada (BCE), who pay a quarterly dividend equal to about 5.3% annually at today's stock price.  That dividend will now pump an additional $530 into your annual cash-flow this year and next year and likely every year after that so long as people keep buying their phone, cable and internet services through Bell.  Another way to look at it is that that $44 ($530 divided by 12 months) of your monthly budget is now paid for each month from your Bell investment.  Its interesting that the one definition of windfall is an unexpected legacy, because that is what you're setting up when you invest this way... it is  legacy cashflow that is potentially for the rest of your life.  What you do with that $44 each month is up to you.  You can re-invest it, or spend it on something else like paying for your internet through Bell.  See what I did there? Investing windfalls is certainly not as sexy as buying a motorcycle, but reaching financial independence has some pretty good perks as well.

By: TwitterButtons.com

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