Wednesday, March 23, 2011

Dealing with bonanzas

OK, I'm using bonanza to mean any extra financial "bonus" you get beyond your regular income. The most common one for people in the US is probably a tax refund, bonus at work, or an inheritance. The problem with these is people often think of this as "fun money." Even worse, I know a lot of people who spend twice as much as they're expecting---before they even get it---then wonder why they're so short after they get it.

Instead of thinking of this money as a freebie to spend on frivolous "rewards," this is exactly the money that should go to either paying off consumer debt or toward your financial cushion. Where normally you try to save between 5 and 25% of your income, think of this money in the opposite. Take 5 to 25% of this money for "fun" and the rest should pay down debt or go into savings. If you have little debt and a healthy emergency fund, take 25% to play with. Be honest about your finances though (honesty is absolutely the first necessary step to getting money under control). If you have debts that are pinching you month to month or little savings, only take about 5% of this for fun. If you're truly on the edge, you may want to consider not touching any of it. Even if you have a well-funded emergency fund, a truly stable job, and no debt, putting at least half of this away (maybe into retirement) keeps a good habit in place.

It can come in other forms too, of course. If you aren't salaried, it can come as pay for extra hours, even overtime, or you might sell something (you just discovered a rare and valuable thingummy in the attic), or you might get a bit of extra work (your second cousin paid you $200 to keep their kids for the weekend). Again, DON'T spend this money before you get it, and definitely don't spend more than you're getting. Pay your emergency fund or debts first, and keep a responsible amount for fun money.

For instance, I got some extra hours this past week. I'd known I'd have some, but I was only expecting about $40 worth and was not planning to touch any of it. Instead, I worked about $120 (after tax) extra. Now, my income is pretty low because I'm a full-time student and during terms, I can only work part time. But I have an emergency fund and no consumer debt. So 5% of $120 is $6. I thought about it and decided that for ME, the most bang for that money in pure pleasure was buying really good gourmet coffee several mornings before work. It may not sound like much, but I really do love good coffee, and I got a lot of pleasure out of doing something I normally can't, more than most people get out of a fine meal at an expensive restaurant. Sometimes, luxury is a matter of perspective.


Amara said...

This has been a tough one for my partner - not mentally double spending bonuses before we get them. He's not the best at money, but he's been learning from me. Our arrangement is that money for household budget each paycheck is given to me first and then what is left is his to spend. 'Household budget' is everything from rent, car expenses, gym and food. Likewise anything of mine after bills are paid is mine to do with as I please.

We agreed that we would both put a certain amount of our bonus toward paying off the car. It's not at the worst interest rate, but his credit was bad when he got it so it's a bit steep - so we're trying to pay it off as early as possible. He got very mopey briefly after our bonus checks arrived, when he realized he wouldn't have much of it to play with after the monster car payment. It wasn't that he disagreed or had changed his mind, but it was a brief moment of 'feeling' poor and the money being gone already that got to him.

We spent a while talking about it, in particular about how he hadn't had any money to spend on himself for many years prior to our moving in together (his ex was very much a leech who couldn't stay employed). When we were done, he felt much better and even made his usual joke about how I was rubbing off on him.

This I can't emphasis enough to couples - you have to be completely honest, open and communicate with each other about money. Find an arrangement that works for you, but you have to communicate and you can't hide things from each other.

Dawnfire said...

Good for ya'll! I understand how he felt, though for me, it was the other side of the reaction. My ex kept us so close to the edge all the time that I'd never been able to save, which scared me. When I finally had control of my money, I had a hard time even spending on things I needed. It wasn't easy to learn to let go a little and spend some money once I had things stable.

Amara said...

That's the one that's hard for me - spending money on myself even when I kind of really need something. It drives the partner slightly crazy, but that's something he's working with me on.