How to Decide What to Do with Extra Money (Congrats, by the Way)

by Will Lipovsky · 2 comments

money bag
Whether or not you admit it, there is a certain thought in the back of your (possibly deep) subconscious that occurs every single time you have a little extra money. Maybe your paycheck was bigger than you expected this pay period. Maybe your Grandma Sue wrote you a check for $100 just for being her favorite grandchild (for the moment). Or maybe you got a nice big check from the government in late spring for being such a good tax-paying citizen. (I mean, one can dream, right?)

No matter how it happened, it happened, and now you have an extra chunk of change burning up your wallet like a book of lit matches. What are you supposed to do?

Half of your brain might be telling you that it is the mature, responsible, adult thing to put it all into your savings account; if you don’t have one, this part of you brain will urge you to consider opening one. The other half, however, has no willpower and immediately makes a list of the new clothes, fitness equipment and electronics this can fund. With your brain conflicting between spending the money on fun and being an adult and purely saving it, your head must be spinning.

The best course of action is the one which allows for compromise — i.e. do both. Yes, you can both save and spend at the same time!

The biggest problem most people have when they suddenly find some extra cash in their possession is that they go out and spend it without a plan ahead of time. They take the money (or their card, backed up by the money in their account) and head out for an evening on the town or a special shopping trip to celebrate.

I am all for living a little and using windfalls of money to enjoy yourself. However, I would be remiss if I didn’t advise saving some of that windfall first. Even just 25% will help build your savings, but I would recommend at least 50%.

If the other 50% isn’t enough to buy what you wanted, use the 72 hour rule: wait 72 hours after you decide to purchase something before you actually buy it. This way, you have time to think over if it is something you really need (or want), or if it would have been an impulse purchase. This also allows you to save the 50% for your emergency fund or (more fun than that) a vacation fund.

If you have student loans, I would suggest altering the percentages a little bit to include debt repayment into the mix. Between saving for yourself, spending on yourself, and investing in yourself (through education with student loans), you can come up with a reasonable division that allows for fun while also allowing you to be responsible. The extra funds toward your student loans can help shave off interest that has built up. (Or, if you’re on top of your interest, it will bring down your principle!)

The moral of the lifelong battle of saving versus spending is that you can do both, but pay yourself first. Once you have “paid yourself” by saving some of the extra money you’ve received for a rainy day, you can spend the remaining however you choose. There is a way to have fun while being responsible, and this will set up good financial habits for the rest of your life.

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