It’s a nice feeling when you suddenly find yourself making more money than you were before. Maybe it comes from a raise or a bonus. Maybe you’ve picked up another source of income. Whatever caused it, there’s value in recognizing it before that extra money even reaches your checking account. To see it early and decide what you want it to do with it.
I don’t mean having it already spent in your mind before it hits the account – a bad habit many of us are no doubt guilty of. I’m talking about having a strategy for how you’ll make that extra amount get to work for you. To know ahead of time how you can align that future pay bump with your priorities.
When I know an income bump is coming, I identify a percentage that I want to assign to a specific financial goal and allow for a small portion to cover a bit of living in the present. I automate this so as soon as the money hits my checking, it transfers to the appropriate account(s), which removes the tendency to let those dollars go unnoticed.
I made the choice to use our last bonus to increase how much I’d set aside for travel. Jamie and I have a milestone anniversary coming up and we’re planning to celebrate with a trip. I wanted to plan for it ahead of time. I set up a transfer for a portion of the bonus to our travel fund. That way it’ll be there when I need it so I don’t worry about how I’ll pay for it later.
After that, I moved 25% toward long-term savings. And the remainder was available for anything else we wanted to spend it on in the present.
Raises and bonuses are great opportunities for quick one-off saving bumps. It’s easier to save a larger percentage of those right away because you likely haven’t incorporated it into your routine spending yet. It’s a lot harder to suddenly save 25% of your paycheck if you haven’t already been doing so.
Note that I said easier, not easy. And especially difficult if you already priced it into your current lifestyle before it even arrives.
This is where extra income stops being extra and starts to feel like a necessity. Instead of living within our means, we treat the extra income as a way to catch up to our spending. To get out from under some of the financial decisions pinning us down and making it hard to come up for air.
There’s just something that happens the second you start visualizing all the fun ways you can spend new money. I’ve caught myself doing a little online browsing or window shopping when I know my annual review is coming up.
That’s where having a plan before the extra income hits your account can help.
If raises or bonuses tend to arrive around the same time each year, you can map out what you expect at the beginning of the year, and what you plan to do with it. And it can also be a good idea to have a plan in place in case what you end up receiving falls short of what you expected.
No matter how big or small an increase you might see, it’s worth earmarking a percentage or dollar amount to go toward at least one of your financial goals. It serves as a way to mitigate against lifestyle creep. That’s a good habit even if your financial goals are on track, but especially useful if you’re a bit behind.
I’ve written before about how I was only able to save enough to get the 3% employer match when I first started working. That was well below what I hoped to be putting away for retirement. I mapped out my plan to save a significant portion of future pay increases and bonuses (upwards of 50%) until I could get my overall savings rate where I felt it needed to be.
Now I’m in a stronger financial position and feel pretty good about the status of my goals. But the habit I formed around income bumps still helps me keep things in check and makes sure I’m at least considering where my dollars are going.
It’s easy to see a bigger deposit and think, “Great, a little breathing room.” Instead, identify some portion of it and give it a purpose: build your emergency fund, invest toward a long-term goal, pay down debt, or whatever else matters to you. You can still keep some to enjoy today.
The important part is not letting it vanish into your normal spending. Otherwise you may find no matter what size deposits start hitting your account, you never feel like you’re making headway.
And you end up always needing a little more room to breathe.
— Brad
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This is meant to help you think through financial decisions and tradeoffs—not tell you exactly what to do. It’s general in nature and not personalized advice (see full disclaimer).