You will be able to explain why windfalls are spent more freely and how to plan for them.
In February, Darren's S$7,000 bonus landed. By May, he went looking for it. A S$2,100 holiday in Bali, a S$1,400 phone, S$600 to his parents and about S$900 of dinners and shopping accounted for most of it. The last S$2,000 had simply dissolved into weekends. He'd carried a card balance through all of it, and at no point had he thought of the bonus as money that could clear the card. It hadn't felt like that kind of money.
A windfall is money that arrives outside your regular pay: a bonus, ang bao money, a tax refund, a GST voucher, an insurance payout, a gain on an investment. In the language of lesson 3.1, Thaler's mental accounting, windfalls tend to land in a special account labelled "extra" or "free". The rules for that account are looser than the rules for salary.
You can hear the label in how people talk. "It's bonus money, I deserve a treat." "It's only ang bao money." "I'll put the refund towards something fun." Salary that arrives every month gets planned around rent, bills and savings. A lump that arrives once a year doesn't fit any of those slots, so it gets its own, and that slot is usually for spending.
Some of that is fair. A year of hard work earning a reward is a reasonable idea, and Money Foundations recommends keeping a share of a windfall to enjoy. The trouble starts when the label decides everything and the windfall never gets compared with the other things it could do, like paying off a card charging far more interest than any savings account pays.
There's a second version of the windfall pattern, and it shows up in investing. Gains from a win tend to be treated as less real than money you earned, and people take risks with them they would never take with salary. Gamblers call this playing with the house's money.
Hui Min had a run of luck last year. An SGX stock she'd bought for S$3,000 doubled to S$6,000. She sold half and used the S$3,000 gain to buy shares in a small company a forum was excited about. "If it goes to zero, I've only lost my winnings," she told Darren. It fell by half, and she now holds S$1,500 of it.
Her reasoning sounds sensible until you look at it from the outside. Once she'd sold, that S$3,000 was cash in her account, exactly like S$3,000 of salary. If someone had offered her the small company's shares in exchange for a month's savings, she'd have said no. Labelling the money as winnings made the same bet feel cheap.
The house money effect has a mirror image. After a loss, some people swing to the opposite extreme and take bigger risks to win the loss back. Both behaviours come from keeping score in separate accounts rather than looking at the whole.
The fix that works best is to decide what a windfall is for before it arrives. While the money is still a forecast, it doesn't yet carry the "free money" feeling, and you can weigh it against your goals with a clear head. Once it's in your account, the feeling arrives with it.
Money Foundations: budget, debt, buffer covers the method in lesson 6.3, Use bonuses, refunds and windfalls on purpose, including how to choose the split and when to act on it. This lesson adds two behavioural checks to use alongside it.
The first is the salary test. Ask: if this amount came out of my monthly salary instead, what would I do with it? If you'd use salary to clear a debt but you're about to spend the bonus on a holiday, the label is doing the deciding. You might still take the holiday. Just make it a choice.
The second is the winnings test, for investment gains. Ask: would I put this amount of my own savings into this investment? If not, the fact that the money came from a gain doesn't make it a better idea.
For his next bonus, Darren wrote his split in his phone in November, three months ahead. The card balance would be cleared first, whatever it was by then. A third of what remained would go to his buffer, a third to a holiday, and a third to spending without guilt. He also decided that ang bao money would go into the holiday account, which kept his favourite jar but gave it a job.
Hui Min wrote one sentence: "Any gain I take out of an investment goes back into my plan, and any bet I want to make comes out of my monthly fun budget, capped at S$200."
Think about the last windfall you received, of any size, and where it actually went. Then think about what share you'd want to go to each of your goals if the same amount arrived next month.
Write what you did with your last windfall and what share you would want to go to each goal next time.
Junxiong-WFG Organisation is an authorised representative of AIA Financial Advisers Private Limited (Reg. No. 201715016G).