A sum of money lands in your lap, perhaps a tax refund or an inheritance, and you’re overcome with the urge to splurge on lavish purchases. That’s the windfall syndrome – if it’s not from your regular paycheque, it’s free money.
In fact, you may experience this very temptation just around now if you’ve already received or are about to receive an annual bonus from your employer. Before you shop for the ultimate home theatre or book a flight to Tahiti, remember that the annual bonus isn’t all that different from a paycheque. It’s a form of income, and it’s taxable.
When money comes your way, beyond your paycheque, you have an excellent opportunity to pay down credit card balances or any other debts with a high interest rate. Another option is to give your investment program a boost – contributing to your non-registered account, Tax-Free Savings Account (TFSA), Registered Retirement Savings Plan (RRSP) or spousal RRSP. Or you may wish to contribute the funds to a Registered Education Savings Plan (RESP) for your children or grandchildren. In the case of an annual bonus, some employers with a workplace RRSP program offer the choice of transferring the bonus directly into your RRSP, without tax being deducted.
Striking a compromise
For some people, the temptation to splurge on a luxury item is just too hard to resist. A solution is to spend a smaller percentage of the annual bonus or unexpected windfall on a luxury item, while dedicating most of the amount to investments or paying off debt. You can enjoy your personal life today and support your financial life for the future.