Say you receive a large windfall.
One that can pay off all your credit card debt and leaves you with a few thousand for some small, needed, home projects.
What would be the best way to handle this after I pay the cards off?
I see the term "fund your sinking categories", what does this mean?
Any other advice so that I can set myself up for NOT amassing credit card debt?
In your case, it sounds like it means putting the left over money into something like a Home Improvement category.
"Fund your sinking categories" typically means funding (typically) larger periodic or one-time expenses, a little at a time. Insurance deductibles, home improvement, or something like Vacation or even Christmas, for example.
And don't forget 3-6 months in Income Replacement if you don't already have that. I've dealt with windfalls several times. If it's only a few thousand left after the debt payoff, and you don't have any general emergency savings, I'd probably forego the home repairs a little longer if possible.
My last windfall was substantial, but also necessary for some large new expenses. 1st order of business was rounding out my emergency fund, so that goal was complete. I budgeted for the next 8-12 months of the other new expenses, including legal, insurance, and taxes. With what was left was put into a holding category and selectively released each month towards other planned and unexpected expenses. And yes, home repairs, improvements, and appliance replacement - most of which has hardly been spent.
Also consider putting towards an IRA or increasing 401k contributions if those aren't maxxed.
Windfalls are so wonderful! Congrats on that!
We had one a few years back that also coincided with the car insurance payment. We were able to pay the entire 6 months lump sum at once, which saved us about $50/month! That's $300 every 6 months, and $600 a year! That's huge! So don't forget to look for savings like that, being able to pay bills in advance or other options that will help you out in the long run.
We did that the first time last year in October, and we've been able to maintain it ever since. Now I prefund the category with a certain amount from every pay check and when the bill is due every 6 months I know the money is there. Since it changes just a bit each time, I usually set aside a bit more than I need, and then we have a little extra that we can apply to whatever we'd like each 6 months.
Rule 2 -- Embrace your True Expenses (a.k.a., "sinking funds"). By the time a non-monthly bill comes around, you should have cash reserved for it in the budget so you don't have to resort to CC debt that you cannot pay off immediately.
Green Hail That's great news! True Expenses (or sinking funds) are things you know will come up, but you don't necessarily know when (auto/home repairs) or they only happen once a year (insurance premiums and birthday gifts).
Some of the money you have now needs to be set aside for these large expenses down the road. A windfall is a great way to get a jumpstart on those categories!
As an example, our home did not have an air conditioner when we bought it. It quickly became apparent that we needed one in time for summer, and got a few quotes. We set a Target Balance by Date Goal for two months before the hot weather would set in—so we were ready to make the purchase.
Use Rule Two: Embrace Your True Expenses to break the amount into manageable monthly “bills” and budget for them every month. When the bill arrives, those dollars will be ready & waiting!