What to do if your Income Goes Up

Important financial decisions don’t always happen when income is low or decreasing. In fact, some of the most important money management decisions you will make is when salaries increase for one reason or another. So how do you decide what to do with the extra? How do you avoid the temptation to throw caution to the wind and go out and have some fun? It is times like these that are critical to your financial future, so don’t make your decisions too lightly.

First, make a list of things you could do with the money. If you are married, be sure to collaborate with your partner.

Here is a sample list:

Things I could do that are fun:

Get Cable or Satellite TV

Get a cell Phone

Increase the grocery portion of the budget

Go out to eat or to the movies more

Get some nice clothes

Get a gym membership

Upgrade or buy a new computer

Hire a maid

Things I could do that are serious:

Buy another car

Pay off Debts

Make principal payments to the mortgage

Start college savings plan for our child(ren)

Expand our emergency savings

Add onto our home

Save for a bigger home

Save for retirement

Increase insurance coverage

After making a complete list, you will almost always come to the conclusion that the expected increase will not cover everything on the list. Now you must prioritize. I am not going to tell you what to choose. Everyone is different. I will tell you though, that if you do not have a sufficient savings account, that you should get one started. If you are not paying down your debt fast enough, it is a good idea to apply a good portion of the increase to pay it off more rapidly.

Your second step is to write down your values. These should be things that are truly important to your well-being and long-term goals. If you want a little direction in this area, I recommend David Bach’s book entitled “Smart Couples Finish Rich”.

Things that are important to me:

Having a comfortable emergency savings account

Being debt-free

Not having to worry about money if something bad happens

Providing the necessities of life for my family

Having fun with my family

Being generous to others

Having a healthy lifestyle

Things that are not as important to me:

Having “stuff”

Retiring early (unless disabled)

Getting expensive things for kids

Going to parties

Remember, your list should look different than the one above, it is just an example. For your third and final step, look closely at the two lists and decide (with your partner) how to best accomplish your most important goals with the extra income. You can decide to divide the extra among several categories or lump it all into a single category.

In the above example, let’s say we are increasing our income by $200 per month and we don’t currently have any life insurance, our savings account is very small, and we have very little debt. One way we might divide up the monthly $200 is as follows:

$50 life insurance

$20 extra to payoff small debt

$50 put in savings

$30 for family fun activities

$30 cell phone

$20 charitable

It would be very simple to change the amounts or categories and still meet some of your goals. Fortunately, there is no right or wrong. The little bit of time it takes to plan the extra income ensures that it does not just disappear every month.