If the Great Recession taught Americans anything about personal finance, it taught us how to be unapologetic pessimists. Case in point? Although GDP, unemployment, and stock market averages have climbed back (or, in some cases, beyond) pre-recession levels, you’ll still routinely see the talking heads on TV lamenting on the sorry state of our economy. Sure, there’s still progress to be made – too many people working part-time who’d rather be working full-time, depressed wages for the middle class, etc. – but to hear these folks talk, you’d think it was still 2010.
When you surf the web, you see plenty of articles talking about how to manage your family’s budget through a crisis: job loss, medical bills, sky-high debt. But what you don’t see is a lot of financial advice for how to manage your money when something good happens. How does budgeting change when you’ve received a raise, a bonus, an inheritance?
Plan After a Raise
That’s the situation my family found itself in a few months ago. My husband and I were both fortunate enough to earn substantial raises which increased our household income by about 20%. And we didn’t know what to do with it.
For a few pay cycles, we let that extra money just sit in our bank accounts. We had the gratification of knowing it was there, but the money wasn’t doing anything for us. So we started to toss around some ideas:
- Paying down our mortgage. Paying down debt is usually a good thing; however, we’d bought our house when interest rates were at historic lows (we’re locked in at 3.67%). We knew our money could do more elsewhere;
- Adding more money to our retirement accounts. These raises meant that for the first time in our adult lives, we could max out the annual contributions to both of our Roths and one of our 401(k) accounts. But we knew that once the money was diverted to those retirement accounts, we’d be unable to touch it (well, for another 30 years, at least!);
- SPEND IT! I think this is the complete opposite reaction to letting it just sit untouched in our checking account, but it’s another knee-jerk reaction that many people experience after getting an influx of cash. My husband bought an expensive new phone that he’d been pining after, and I splurged a little on my wardrobe. In a way, I think it was helpful to get it out of our system. We came, we spent, we felt a little guilty – and probably won’t make a habit of it in the future;
- Engage in lifestyle inflation. This is similar to simply spending the money, but it’s a little bit more insidious. Lifestyle inflation tends to creep up on you; maybe you start dining out a few more times each month, add in a Hulu Plus subscription, and get addicted to $15/class Pure Barre workouts, and voila! You’ve succumbed to lifestyle creep. You may even figure out a way to work those items into your monthly budget, at which point they start to feel completely valid.
Ultimately, my husband and I sat down and discussed what we wanted to do with this extra money from a big picture perspective. We don’t carry debt beyond our mortgage (but if you have personal, student, or credit card debt with a high interest rate, this should be your starting point), so we saw this as an opportunity to really shore up our budget and investments. Here’s how the money has been allocated:
1) 30% of it is going directly to our retirement accounts; we don’t even see the money in our checking account, because it’s funneled off right from the get-go;
2) 20% is going to a newly created “vacation” account. We’ve really slacked on traveling over the past few years as we climbed the corporate ladder (I hate that phrase, but it applies here), and want to use this money to ensure that we’re seeing the country and experiencing new places and things with our children;
3) 40% is going to our renovation budget. We’re in the middle of renovating our home, and have done much of the work ourselves. But there are certain things – like taking out walls, running complicated electric cables, or moving plumbing fixtures – that are beyond our area of comfort, let alone expertise. At least over the next year or so, we’ll use this money to ensure we can hire professionals when the need arises to make sure a project is done right. Eventually, once the major reno projects are finished, we’ll siphon a large chunk of this money off into our retirement accounts;
4) 10% is our “discretionary” fund – in other words, our fun money. We knew that lifestyle creep was inevitable, but we felt that by setting aside a certain amount of money in this way, we’d at least be able to keep it in check.
Have you ever experienced an influx of money? How did you learn how to manage that money, so that it worked in your favor?