The price of crude oil has fallen by 30% since the summer. Depending on your state’s gasoline taxes, the average person will spend $525 less on gasoline in 2015.
So what are you going to do with your extra $525? In my opinion, the same thing that you should do with all unexpected income: divide it into portions and make certain that some of those portions increase your net worth.
Whether you receive an inheritance, win a prize, receive a gift, or in this case, have an expense drop, you have two main choices: spend it all or save it all. Of course, the most prudent action is to save it all and then only spend some of its investment income. But to be realistic, most people will spend some portion and hopefully save some portion. This savings can go toward: paying down debt, adding to a retirement or college savings accounts, or some other net-worth building location.
The reason that you should use some of any unexpected money to add to your net worth is because: anytime you can improve your net worth for free, then you should do it. Extra income or a reduction in your expenses allows you to increase your net worth without money being taken from your routine budget. If the price of gasoline were to shoot back up tomorrow, then what would you have to show for 6 months of lower prices: something or nothing? Adding to your net worth is the only way to permanently benefit for the rest of your life from an unexpected gain.
In the case of dropping gasoline prices, you could also set some of this $525 aside as a reserve to pay for higher than average gasoline prices when they go up again. Or, you could do what the airlines and trucking companies do, hedge your gasoline price. One way to do this, as a small retail investor, is to purchase an exchange-traded fund (an ETF is a fund that trades just like a stock) that tracks the price of gasoline. If you buy some of this ETF periodically as the price of gasoline is falling, then you may be able to sell it for a profit as gasoline rises. This profit will help offset your fuel expenses later – if and when prices move higher.
For some people, $525 may not be a lot of money. However, these concepts apply to any amount of unexpected income. Whatever you decide to do with your $525 windfall, it will have a permanent impact on your net worth. Do you want it to be favorable, neutral, or unfavorable? The financially literate will move this money in a way that is certain to be favorable to his or her net worth.