What Most Americans Do Wrong With Unexpected Cash -- and How To Avoid It
Receiving an unexpected cash inflow is a good problem to have. A sudden influx of cash can range from a healthy tax refund to a surprise bonus at work. Such inflows arrive in your checking account, and they're different than a paycheck.
You may have plans for your paycheck, but a windfall can invite impulse decisions that could harm your budget. Avoiding impulse can help bolster your finances and set you on the path to achieving important goals.
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Here are mistakes many people make with windfalls.
They Don't Have a Plan
Planning is a helpful way to manage your finances, whether it's a monthly budget or unexpected cash. Avoiding planning reduces the likelihood of using any portion of the cash influx for good.
For example, the average tax refund in 2025 was $3,116, according to the IRS. Taking time to ponder how best to use those funds could help many grow their emergency funds, pay off debt and more. There's no one-size-fits-all approach to how to use unexpected funds. It's wise to thoroughly review your financial picture to determine where it can be best used.
That process may take time, but that's ok. The goal is to use the funds to get ahead. "Often with personal finances, it seems like getting ahead comes from hundreds of tiny decisions that lead to progress. Yet with a windfall, you can make one good decision about what to do with the money that might lead to years of progress," said R.J. Weiss, CFP and founder of The Ways to Wealth.
They Treat It Like Spending Money
It's not uncommon for many Americans to receive windfalls in their checking account, or via a check, only to have them go into a checking account. Leaving that money in the same account that pays for bills and debit card charges instantly puts the extra funds at risk of being spent.
Weiss suggests removing the funds immediately to avoid unnecessary spending. "The first thing I'd do is transfer it to a high-yield savings account. Get it out of your checking account. Make the money difficult to spend," said Weiss.
Doing this lets you earn interest until you determine a plan. That doesn't mean you shouldn't spend any of the cash on something fun. Set an amount you want to use for fun and use it in that way. "Anywhere from 1% to 10% could be reasonable, but you don't want to go above that," added Weiss.
It's Used To Justify Lifestyle Inflation
Using a surprise influx of cash to justify lifestyle inflation is understandable. No income level is immune from lifestyle creep, either, according to Goldman Sachs. Using extra money to rationalize excess spending can easily backfire and make matters worse.
"The problem with this [lifestyle inflation] is that their new baseline monthly cash flow assumes they're going to receive the windfall regularly. But most windfalls, like a work bonus, cannot be counted on like a true salary. And if that windfall goes away, they've made it very difficult for themselves to get by from month to month," said Weiss.
Rather than submitting to lifestyle creep, commit not to spend any of the money for 60 to 90 days. If you do spend, direct funds to expenses that lower costs, like a needed repair, or attacking high-interest debt.
They Forget To Pay Taxes on It
Depending on the form of the windfall, taxes may be a reality. Certain gifts, settlements and payouts can incur taxes. If you have a side hustle and have a surge in income, those funds likely create a taxable liability.
The last thing you want is to spend the entire amount, only to have to pay taxes on it later. "If you're going to owe taxes on the amount, make sure to set that aside as well," said Weiss. Speak with a tax advisor if you're unsure of what amount you may need to pay. You can put those funds in a separate savings account to access when the IRS comes calling.
Getting unexpected money is fun, but it's important to use the funds wisely. Thoughtful use can mean the difference between continuing to struggle financially and achieving a long-term goal.
This article was provided by MoneyLion.com for informational purposes only and should not be construed as financial, legal or tax advice.
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