My 5-Part Plan for Extra Money

Whether it’s stimulus checks, tax refunds, friendly donations, or work bonuses many of may receive unexpected money in our bank accounts from time to time. Although this money is greatly appreciated, without a plan, we may inadvertently spend it all in haste. As money savvy young professionals, we should have a plan for unexpected money and use it to meet some of our financial goals. Here is my 5-part plan for any extra money I receive:

1. Allocate a percentage to building wealth. As someone who has a goal of building generation wealth, a percentage of all the money I get goes towards increasing my net worth. I increase my net worth in two main ways: 1) by investing in assets (like stocks and real estate) that will increase in value overtime, and 2) by paying off liabilities (aka minimizing debt) that take away from my wealth. In other words, when I get extra money, I invest a portion of it and pay down debt with another portion. In fact, one of the first things I did with my first few paychecks as a resident doctor was allocate about 10% of each check to paying off the credit card debt I accumulated in grad school and invest another 10% in index mutual funds within my work retirement plan. My goal is to use a percentage of every dollar I get to build wealth by increasing my net worth.

2. Reserve money for taxes. Unless the money I receive is a tax refund or an untaxed gift, most of the time, when I get extra money, I will have to pay taxes on it. This is true for you as well. It doesn’t matter if you did all the work in your job, or took all the risk in that investment or business idea that has finally paid off, when you make money, Uncle Sam wants a cut. Since I don’t like having to scramble to pay extra money in taxes each April, I plan for my taxes throughout the year. Anytime I get extra money that I know will be taxed, I set aside a certain percentage for taxes and place it in a savings account.

3. Pay tithes and give to charity. As a Christian who goes to church and believes in giving back to those who are less fortunate, I set aside money for giving. One of things first things I do with extra money is give 10% to the church, as part of my tithes. I then allocate additional money for giving to charities or people outside of church. Sometimes, I invest in my friends’ businesses. Other times I donate to a non-profit or bless someone I know with an expected gift. As a successful young professional who is actively building wealth, I recognize that despite my hard work and dedication, I have several advantages and blessings that other people do not have. Because of this realization, I try to be a good steward of my resources by giving money away and making a difference in the lives of others.

4. Save money for future expenses. As someone in her early 30s who hates surprise expenses and loathes credit card debt, one of the things I do with unexpected money is save some of it, in cash, for future large expenses. I try to always have money in a savings account to pay for what I call “friendship expenses” like weddings, birthday parties, and baby showers. Between bridesmaid dresses, bachelorette parties, bridal showers, and wedding gifts these expenses are not cheap so I have to plan ahead. Along with these “friendship expenses,” I also reserve money in my savings account for vacations. I also have an emergency fund for unexpected expenses or changes in income and plan to start saving money in a “housing fund” to cover the down payment on a future home. My point? There are always large expenses I have coming up and as someone who likes to plan ahead, I like to have money set aside for these things.

5. Give myself a spending allowance. Although I prioritize building wealth, I also like to live in the moment. So although I may not treat myself all of the time, I do reserve some money to spend from time to time. I love to invest and I understand the importance of being responsible with money, but I am realistic. I know I can only delay gratification for so long without completely going insane. Thus, I find ways to “treat myself” and reserve a portion of the unexpected money I receive as a spending allowance. Sometimes I’ve gone shopping, other times I’ve booked a trip to see a friend. Sometimes I treat myself to a fancy restaurant and other times I’ve bought some new gadget or electronic device. Finding ways to enjoy a portion of your money is key.

Plan for the Unexpected

If there’s one thing I’ve learned as an adult it’s that sometimes things just happen. You may think you are on track with your career, your finances, or your personal life, but life has a way of surprising us. Sometimes these unplanned events are good. We get a promotion at work, another stimulus check from the government, or an impromptu visit from a friend we haven’t seen in a long time. But other times, these surprises are major problems we couldn’t have predicted or avoided, especially when it comes to finances.

You may be costing along, saving and investing a certain percentage of money and then something unexpected happens. Your car breaks down, your laptop dies, or something urgent comes up that requires your time, attention, and money. Up until a few years ago, these unwelcome occurrences would get me down and make me anxious. I’m a planner who would get frazzled whenever things deviated from how I envisioned.

In order to decrease my anxiety, and feel better prepared, I needed to start planning for these inconveniences, at least the financial ones. I used to just rely on my emergency fund, but then I realized I was needing to dip into that fund a little too often, so I had to put a better plan in place.

My solution was 3-fold:

1. Cut back on unnecessary spending elsewhere. I re-examined my budget and tried to think about ways I could cut back. For me, it was decreasing the amount of money I spent each month on food and wine, especially when I’d travel out of town. I set a preliminary spending limit every time I went to a restaurant so that I wouldn’t go overboard. I also began to cook more at home and was more diligent about searching for discounts whenever I’d travel out of town.

2. Set extra money aside each month. For me it was $200. Whenever I got paid I’d automatically plan for $200 to be gone in “incidentals.” If I didn’t have to spend the money one month then I could use it however I pleased but if I did need to spend the money then at least doing so wouldn’t totally wreck my budget. Having money set aside for these unexpected expenses made me less stressed when things would come up.

3. Increased my income. While I was waiting to see if I’d get a raise at my main job, I took matters into my own hands. How? By trying to make more money from other income sources. Whether it was working extra shifts at the clinic or trying to monetize my hobbies and side hustles, I tried to increase my income so that unexpected expenses wouldn’t totally destroy my budget and savings goals each month.

Do you also have added expenses that come up each month that throw you off your game?

If so, the solution isn’t to just charge the expenses on a credit card and hope to pay off the card someday. You may want to adopt a plan similar to mine so that you are more proactive and less reactive when/if these unexpected expenses occur.