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Picture this: you’ve got that budget of yours put together correctly and everything is running smoothly. Income comes in each month, expenses are paid, the emergency savings fund is established, and you are steadily chipping away at your debt. You are confident that this will be the budget that gets you to your financial freedom.
And then trouble hits: you come across some unexpected income. Perhaps you’ve just graduated and a flood of cards with money in them arrived, or it could be a birthday gift or a large tax refund. Whatever the reason, you’ve received this extra money, and don’t know what to do next.
We’ve all been there and, in most cases, receiving unexpected (and extra) income is exciting and comes with the opportunity to purchase or do something you haven’t had the money for in previous months. In a new budget situation, however, having extra income grace the bank account can actually be a source of anxiety and, if not carefully handled, has the potential to derail the entire budget.
Yes, you heard me right: unexpected money can derail your entire budget.
To prevent that from happening, it’s important to carefully consider your intentions for that additional money. Are you going to save it, pay off debt with it, or spend it? Depending on what your financial goals are, the answer might be hard to come by, so spend some time weighing all of the options.
If you don’t have a fully funded emergency fund, add the money to it immediately. No matter how little or how much, having the money contribute to that fund will provide peace of mind if you ever do find yourself in an emergency situation. It might even help to prevent total budget failure in the future. No one I’ve met has regretted having an emergency fund and in this case, since the money was unexpected, you won’t even miss it!
Pay of Debt
After the emergency fund, paying off any outstanding debt should be your next course of action. Check your debt payoff plan and apply that unexpected income to the smallest debt you have.
Long-term, you will find that this single debt payment (depending on the amount) could make a big difference in achieving your goals. If nothing else, you will save yourself money on future interest.
Ideally, you wouldn’t spend any additional income without first funding your emergency savings and paying off your debt. If those two items have been taken care of completely, then the temptation might be to simply spend the money. I’d like to caution you against this for one reason: spending a little money often leads to spending a lot more money.
Let me explain.
You’ve been very careful with every dollar since you started your budget, ask yourself with each purchase made which category it fits into and whether your budget will allow it. By spending this extra money, you take yourself away from the pattern of budgeting you’ve created and put yourself at risk of falling back into your old ways. After all, having a little money to spend isn’t a bad thing unless you are addicted to spending.
It’s similar to being on a diet and having someone show up with a bag of cookies. Having one cookie won’t destroy the entire diet if you stick to that one cookie, but if you eat the whole bag and spend the following afternoon making a special trip to the store for more, then it’s going to do some damage.
I, personally, have a hard time with the idea of spending money. Once I’ve been out shopping, I really want to continue shopping. It’s fun, and it makes me feel good, and it often leads to too much money spent and a lot of regret. If you can carefully spend the unexpected income, and ONLY that income, then I say go right ahead. If not, make other plans for the money.
A good alternative is to split that money and add it to the smaller categories of your budget. Perhaps you know that your child could use a couple of pairs of shoes, and you’ve been avoiding that because there hasn’t been any give in the budget. Add enough money to cover that expense to the “kids clothing” fund. It might not need to be spent right away, but it could offset the cost down the line. By splitting it into a few categories of that nature, the urge to spend it all needlessly is put aside.
No matter what you decide to do with that unexpected income, the best thing you can do for the future is to create a plan. Sit down with your spouse or family and discuss what will happen with any extra income you come across. It could be that any additional monies go toward that family vacation you’ve all been hoping to take or to purchase a new car when you’ve saved up enough money. Look back at those financial goals you made when you first started this budget and determine how the extra income will you help you achieve them.
In our home, all additional income goes to paying down student loans. While we are chipping away at them monthly, each additional payment we make cuts time off our quest to achieve financial freedom.
Is it hard to add that money to the student loan payments rather than using it for new clothes or other wants? Yes, at times it is, but because we have carefully planned our budget to allow for occasional new clothes and a bit of monthly spending money, we don’t feel deprived when that additional “surprise” income goes straight to those student loans. In fact, we can celebrate, because we know we are one payment closer to being completely debt free.
By making a plan you take the guesswork (and the anxiety) out of what to do with unexpected income in the future.
Have a wonderful day!