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.