‘Where did the money go ?’ How to handle a bargain

Jax refunds. Child tax credits. COVID-19 relief checks. We dream about the next unexpected bundle of cash that lands in our lap. It might be a few hundred dollars from a yard sale, maybe even more from a job bonus — or hundreds of thousands from a winning lottery ticket or inheritance. . Our minds race with the possibilities.

A windfall can either be a lifeline for short-term financial relief or a stepping stone to long-term financial stability. But due to our inherent financial personality, we cannot make the most of surprise money.

Financial decisions in times of crisis

A 2021 study published in the Journal of Family and Economic Issues found that emotions related to money can dictate whether we decide to spend or save on a windfall — even in a crisis environment.

The research looked at how recipients of COVID-19 relief checks used the money. People with existing financial resources who were previously inclined to save and invest did just that with the COVID-19 windfall, says Sarah D. Asebedo, lead author of the study. Asebedo holds a doctorate in financial planning and is an assistant professor at Texas Tech University in Lubbock, Texas.

“When people with these characteristics enter crisis environments, they likely have developed some resilience in their financial situation, such as an emergency fund or investments,” Asebedo says. “So they could use their windfall for things like ‘cravings’ or saving and investing more, because that’s what they’re wired to do to some extent.”

Those who needed to make ends meet during the pandemic mainly used the money to repay the debtadds Asebedo.

Defining your financial personality

How you handle a windfall, whether it’s a federal stimulus check or an inheritance, is largely tied to how you handle money daily.

Thomas Shortreed, a behavioral financial advisor in Cortland, Ohio, uses a questionnaire to determine a client’s financial personality. It provides insight into our relationship with financial matters. Questions include:

  • How emotional are you about money?
  • Do you prefer to save or spend?
  • Do you reflect on your decisions?
  • How confident are you?
  • How involved are you in financial decisions?

Based on how you answer questions, your personality type is identified, says Shortreed. “I can look at this personality type and get a general idea of ​​how you probably think about and process decisions about money.”

Personality types include Money Master, Optimist, Perfectionist, Producer, and Safety Player. You can find similar money personality online tools.

The difference between earned and unearned deals

Your mind may also react in different ways to the type of boon you receive.

In many cases, windfall gains earned, such as a job bonus, trigger longer-term attention to how the money is spent, Shortreed says. There’s often a bit more care in spending it wisely.

However, sudden unearned money – like winning the lottery or receiving an inheritance – may trigger a different reaction. Because it didn’t work, he says, in many cases it was spent recklessly.

“Money is very emotional. It feels good in the short term to buy things you haven’t had or never wanted.”

An example: Shortreed advised certain members of a group of lottery winners.

“The ones I dealt with were saving money for their kids’ college. The others were buying all kinds of fun stuff. My clients had their kids through college and had peace of mind. “

How to handle the extra money

The debt can be erased or reduced with a windfall. But many times, we later repeat the same spending mistakes, without succeeding in breaking the recurring debt habits.

When a deal is received, Shortreed suggests:

  • Pause and reflect on good and bad financial decisions from your past.
  • Focus on medium and long-term goals, not short-term desires.
  • By taking into account your fundamental values ​​(family, security, autonomy, etc.).
  • Review your financial personality type.
  • Asking a partner to hold you accountable.

The key to getting the most out of a bargain: take your time.

“Put some separation between receiving that money and using that money. Give yourself time to sort out all those emotions. worry about using it correctly,” says Asebedo.

Consider your attitudes towards money, your values ​​and long term goals before receiving a boon to help relieve that stress, adds Asebedo.

“Thinking about some of these things before you get a bargain is healthy because if and when you do eventually get a bigger lump sum, you’ll be more psychologically prepared to make a decision that will do you good later.”

This article was written by NerdWallet and was originally published by The Associated Press.

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