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.

New [Money] Goals for the New Year

The new year has officially started and I’m not sure about you, but I couldn’t be more grateful. 2020 was filled with a lot of unexpected events and stress. Although many of us found ways to remain grateful and achieve things we are proud of, I’m glad 2020 is over and am really looking forward to this new year.

At the start of each year, I always make a list of goals I want to accomplish. This year is no different. One of the main categories of things I plan to improve in 2021 are my finances. If you’re also thinking of improving your finances in 2021, here are some money goals to consider:

1. Cut back on unnecessary expenses. I realize this sounds vague but for me it’s all-encompassing. Although I did a good job in 2020 saving and investing money in separate accounts, one the things I want to do better in 2021 is spend less money on things I don’t need. Although I do plan to enjoy my life, I want to be more diligent with my discretionary spending. Particularly, when it comes to my love for wine and guilty pleasure of buying new clothes. Do you also feel you should spend less money on unnecessary things in 2021? If so, what things do you think you can cut back on? What kind of plan are you going to put in place to ensure that you follow through on this goal?

2. Pay off one of my debts. One of my life goals is to become completely debt free. Although paying off all of my student loans (or getting them forgiven) may be a long way away, one of the things I plan to do in 2021 is pay off at least one of my debts. Since I bought a slightly used car a year ago, one of my goals has been to pay it off relatively quickly-which I should be able to do next month. What about you? Do you have a car loan, credit card balance, or student loan that you can attempt to pay off in 2021? If so, consider putting a plan in place so that you can achieve this goal by the end of the year.

3. Establish additional revenue streams to increase my income. 2020 reminded us that our jobs and our current incomes can change. One of the things I want to do in 2021 is become more financially secure by increasing my current income. Although an increase in salary is dependent on my job and other forces I can’t control, one of the things I can control is money that I make outside of my job. For me, that means making more money from blogging or working extra shifts at other medical facilities for added income. For you, it may mean, finding a way to monetize your hobbies and make additional revenue outside of your day job. Creating other income sources gives you more financial protection, allows you to save more money, and makes you less reliant on your day job. Are there additional revenue streams you can explore this year?

4. Save money for a large purchase or fun trip. 2020 taught us that life is unpredictable. Since our health and lives can change, one of my 2021 goals is to enjoy my time off from work more by doing something that makes me really happy: traveling. Since I didn’t get to travel nearly as much as I had planned to last year, in 2021 I plan to make up for lost time, if possible. One of the ways I’m preparing for this is by saving even more money from each check into a “vacation fund” so that I can travel to various places without incurring debt. What about you? Do you plan to travel somewhere in 2021? If so, perhaps you too should start saving even more money into a travel fund. If travel isn’t as important to you, is there an expensive item or gadget that you’ve wanted to purchase?

5. Invest more money by contributing more to retirement. Along with decreasing my debts and saving up money to enjoy a nice trip, I also want to increase my net worth. The two main ways to increase your net worth is to lower your liabilities (aka pay down debt) and increase your assets (purchase things like stocks, real estate, or business that allow your money to increase in value). One of the ways I plan to increase my assets is by investing more money in my retirement accounts, especially my Roth IRA. Contributions in Roth accounts grow and are withdrawn tax free which serve as a huge advantage when I take the money out in retirement. By contributing more to retirement via these Roth accounts, I can invest more money in index mutual funds (which are groups of thousands of different stocks) in a tax efficient manner. This will allow my money to make even more money over time, which will increase my net worth. Are you planning to contribute more to retirement this year?

6. Give more money to charity. One of the things that surprised me last year was how much joy I got from giving. Whenever I sent money or bought someone a gift, I would think of the person’s reaction to the gift or be reminded of how much I was helping someone else and instantly be filled with happiness . As a physician, I’ve been blessed in many ways and one of my 2021 goals is to give more and “pay it forward” to others. Tell me, have you thought about giving more to others? If so, what type of gifts or contributions are you planning to make in 2021?

Tell me, what are some of your 2021 money goals?

5 ways to ensure you’re financially protected against the unexpected

As we continue to advance in our careers, we must ensure that we have protected ourselves financially. If unexpected expenses, life events, or pandemics, come our way, we must make sure we have the financial means to cover our bills and take care of our families without worry. Here are 5 ways to protect yourself financially:

1. Keep your fixed expenses low. One of the first things you can do as you are getting your finances in order is keep your fixed expenses low. Fixed expenses are regular expenses (like your monthly rent or mortgage payment) that don’t vary much in price and occur each week or each month. Keeping these expenses low allows you to save and invest more money towards your future goals. It also gives you a cushion financially in case something unexpected arises. If you have the unfortunate luck of losing your job, undergoing financial hardship, or simply living through this current pandemic that has wrecked the economy and lowered your salary, it is much easier to adjust to the changes and make any necessary spending cuts if your fixed expenses are low. If your fixed expenses are high it is much harder to weather the storm and cover your bills during times of hardship. Keep your fixed expenses low.

2. Reduce (and eliminate) your debt. Along with decreasing your fixed expenses, you should also work to eliminate your debt. The sooner you pay off your credit card bills, car loans, and student loans the sooner you’ll be debt free and have less money from your paycheck going to these expenses. It’s much easier to adjust to a reduction in income or a financial hardship when you have fewer bills and expenses to cover. Plus, paying off your debt leaves more money in your pocket each month that you can use to save or invest for the future.

3. Insure yourself against catastrophe. As we’ve all seen during this pandemic, you can’t always predict when financial hardship will occur or how long it will last. Aside from keeping your expenses low and paying off your debts so that you are better able to handle any income changes or unexpected expenses, you should also make sure you’re insured. We can’t always predict when large expenses will occur and may need some assistance if they do occur. Just like all people need health insurance, all working people should also have disability insurance. You need disability insurance so that if you are injured, sick, or unable to work at your full capacity for a prolonged period of time, you can get money each month to cover your bills. People with a spouse, kids, or family members who depend on their income should also have life insurance so that if they pass away unexpectedly, their family members are covered.

4. Save money for unexpected emergencies. Although you can’t always predict when unexpected things will occur, you should prepare for this possibility so that you are ready if it does occur. Part of protecting yourself financially means having an emergency fund with enough cash to cover 3-6 months of expenses. It may take some time to save up this amount of money, but putting a certain percentage of each paycheck into a separate bank account for emergencies will ensure that you are protected financially. Many people who had emergency funds before the Coronavirus pandemic found themselves in a much better position to handle the economic impacts than those who did not have an emergency fund.

5. Make sure your retirement is funded and diversified. Another thing you can do to protect yourself financially is make sure that you have invested money for retirement in a way that increases your profits and decreases your risk. Many people who were not investing money toward retirement when they were young have fewer years to let compound interest work in their favor and may have to work even longer and save even more money to be able to retire after several decades in the workforce. Others have invested a great deal of money towards retirement but have done so in a way that makes them extremely vulnerable to changes in the real estate market or stock market. Both groups of people may be even more impacted than others during this current pandemic. The goal is to have your money invested in many different companies across a variety of industries (ideally through index mutual funds) so that you are in a good position to gain interest on your money overtime but better protected in an economic downturn.

My point? While none of us have a crystal ball to predict when unexpected things will occur, we can do the things above to protect ourselves if and when hardship arises.