Should You Save Or Spend Cash Windfall

Quick: If I gave you Kshs 200,000 today, what would you do with it?

Every so often, or at least once in a lifetime, we receive money we didn’t expect. It may be from a lottery winning (very rarely), your employer could feel generous and decide to reward you, or you could close a business deal and get more profits than anticipated.  Windfalls may be rare, but it doesn’t hurt to have ideas on how you would use the money, it helps you be more objective when you get the money.

In my opinon, you have three choices: Save it, Spend it or Invest it. Let’s evaluate each of the options more carefully.

1. Save It

Saving a windfall is one of the best things you can do on the “good financial decisions” scale. It may be the most boring option to an exciting winning, but having savings gives you peace of mind, and nothing can compete with that.

I recommend that everyone should have an emergency fund that’s equivalent to at least 3 months living expenses. If you don’t have one, using the windfall to start building one is a great idea. The question then begs, what options do you have for saving the cash?

1. Bank savings or fixed deposit accounts
2. Saving in a SACCO
3. Lending to the government by buying Treasury Bills or Bonds
4. Lending a friend to repay with interest (worst idea ever).

Do not worry if you don’t understand any of the above 4 options, we will look at them in more detail in another post.

While saving will not provide immediate gratification, when done right, it turns the windfall into a money machine that keeps on giving into the future.

2. Spend it

Admittedly, this is the most tempting and immediately gratifying option. We all have things we’d like to have that we can’t afford, and unplanned income is ideal for buying these things.

Spending a cash windfall is not necessarily wrong, it all depends on where you spend it. It’s advisable to spend the money on things that have life long benefits. For example buying to replace an old car that costs  too much to maintain, or paying off loans to free up your payslip for more savings are great ways to spend the money.

What about clothes, shoes and gadgets? I have sad news about this. Spending on doodads may be gratifying, but their effect on our overall long term happiness is negligible. A new phone is exciting for about 6 months, then a new version is released and you start slowly hating the one you have. Considering the fact that a windfall comes our way possibly once ina lifetime, do you want to spend it on something that will bring you no joy in less than a year’s time?

3. Invest It

How is investing different from saving? When you save money, there’s a very slim chance of losing it, and at the same time, the earnings from the money are less to compensate you for reduced risk (less risk, less return). Investing means taking a bit more risk, and the chance that you could lose your entire investment, in addition to a bit more return.

There are various investment avenues:

• The stock market. Last week we started looking at how to pick stocks.
• Real estate. The hottest thing in Nairobi today is buying a plot, whether this is the wisest move or not, we’ll see as time goes by.
• Investing in businesses. A while back I wrote about the Management Model of owning a business.

Of course, decisions aren’t as clear cut as I’ve made the above three to appear. You may choose to spend and invest, or save and spend, or do all the three depending on the opportunity on the table. It doesn’t have to be all or nothing. You can save it, then spend later.

What I’d advise is, whenever a spending decision seems overwhelming, keep the money in a safe place, and give it a bit more thought.

Have you ever had a windfall that you didn’t know what to do with immediately? What did you do with it?

Photo Credit: Salvatore Buono

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