The Extra Money Problem
What do you do with extra money?
This is the best problem to have with money, and therefore, probably the thing we think about the least. What do you do when you have extra, or unexpected money? How do you decide where it should go?
Know ahead of time
You might fall into extra money from a raise, a bonus, an extra client, a tax refund, or perhaps a gift or inheritance. Maybe you have some extra money each month because your Bottom Line is lower than your income (this is the place we should want to be!). It’s easy to just put this money in your bank account and use it for everyday purchases. And it can feel so disappointing for it to suddenly be gone leaving you with the feeling of “where did all that money go?”.
What to do instead? Plan ahead of time. Know your Bottom Line – that is, what you need to live every month, month over month, and then decide where you will put any extra money. What is the list of priorities to use extra money? Consider this order:
If you have debt, plan to put the extra money towards the debt;
Fund a 3-6 month of income savings account; and then
Reach annual retirement goals.
From here, it can be a little more life dependent, but regardless, set goal amounts. If you have kids, you might want to add to their education savings accounts (define a specific amount you want to add each year, based on your specific needs – remember, a lot of times, these funds can also be used for K-12, in addition to college). You might have a specific big purchase in mind, like a trip, a car purchase, or a home down payment. If you’re interested in lowering your Bottom Line and you own a home, think about making additional mortgage payments. Identify meaningful goals and apply the money accordingly.
If you’re in a place where you’ve checked off all your boxes, then think about how you can use extra money to enhance your life. What would make it feel meaningful? While it can be fun to think about getting a new toy with an influx of money, wait until you’ve checked these other boxes first. When you know your bases are covered, spending it on something meaningful will feel that much better.