Spend Money Before You Earn It
The following guest post is from Craig Ford of MoneyHelpforChristians.com.
The only good way to spend money before you earn it is to spend it on PAPER.
Spending it on paper first is especially important for UNRI (Unexpected Non-Reoccurring Income)
What type of income is considered UNRI?
- Gifts - Christmas, birthday, or any other occasions where someone gives you money
- One time earning opportunities – this might include an honorarium for a speaking engagement, a thank you gift for a service you offered someone, or getting paid to participate in some type of survey.
- Side Job – You’ve been working away at turning a hobby into a source of income. Sometimes you make money, sometimes you don’t. It certainly isn’t consistent enough income that you can depend on it or predict the amount of money it will provide.
- Inheritance
- Prize/bonus money – while I personally don’t gamble and rarely even participate in raffles, some people will get money this way. You might even have signed up for something that rewards you with a cash bonus.
- Any other source that currently you do not know the amount, frequency, or likelihood of getting money.
My theory is if you don’t pre-spend UNRI on paper you will waste it when it comes!
Our spending can be categorized in one of two ways: Reactionary or Proactively.
Reactionary Spending:
We get a check for helping someone and we say to ourselves, “Hmm. I wonder what I should buy?” On other occasions we might get a cash gift and we immediately start to wonder how we should spend the money. People love to ask the question “What would you do if you won a million dollars?” Most of us won’t really need to answer that question, but many of us will need to know what we would do if we got $100.
The problem with reactionary spending is that it tends to be spent on short-sighted, temporary desires.
Proactive Spending:
A better way to spend is proactively according to a predetermined game plan. In other words, spend it on paper before you make it.
Here are five suggested places you could allocate some UNRI:
1. Giving
If you decide that you will give only when you have extra money, you will probably never have extra money. Decide today to give a certain percentage of your next UNRI dollar. Once you receive that dollar you don’t need to decide if you are going to give some or not. That decision has already been made before your greed can emotionally influence you to keep more of the money.
2. Debt Reduction
A common complaint when it comes to paying off debt is that people feel as if they are not getting any traction. They feel as though they are simply treading water without making any progress. Putting your UNRI towards debt payment will both reduce your debt load and motivate you to become debt-free.
3. A Long Term Saving Goal
This might be saving for retirement, saving up for a new car purchase, or saving for a home down payment. Because the money is UNRI it shouldn’t impact your normal budget so this gives you a great opportunity to contribute to some of your long term goals.
4. Short Term Purchasing Goal
Perhaps you have been wanting to do an upgrade on your house. Maybe the car needs a new air conditioner. Perhaps you have been wanting to take a vacation for some time. This unexpected income can help you purchase some of those items.
5. Fun
Some of this extra money can be used just for fun. It’s not bad to blow some of your UNRI, but make sure you decide how much you want to blow. Since the money is unexpected it is alright to enjoy it, but keep your passions in check by predetermining how much you are willing to use for fun.
Go ahead and decide today, how are you going to plan to spend your UNRI?
You don’t need any number, just percentages. Grab a paper or open a Word document and write the words give, debt, long term savings goals, short term spending goal, and fun. Now beside each word put a % amount. The only rule is the numbers need to add up to 100%. Below is an example (but not a suggestion). You will need to customize these numbers according to your situation. If you have consumer debt that should get your largest percentage by far.
Give: 15%
Debt: 20%
Long term savings goal: 25%
Short term purchasing goal: 25%
Fun: 15%
Now you have officially decided to be proactive with your spending. Next time you get an unexpected check you know exactly where to put that money.
About the Author: Relying on his ministry experience and background in Biblical Studies, Craig Ford writes daily personal finance articles from a Christian perspective. You can visit his site at www.moneyhelpforchristians.com or you can sign up to receive free daily email updates.
Hi
I like the fact that you allow some room for “fun” spending. This means that this advise is more likely to be followed.
I have two sources of irregular income. One is my bonus at work, which can be anywhere from $0 to $250 a month. I send the entire net of that to my debt reduction (currently <$34k).
I also have some occasional income from a referral program. It can range anywhere from $10 to $200 and I always consider it “fun” money. This income is very unpredictable, two years ago it topped $6000 (including an all expenses paid trip to Puerto Vallarta), last year not so much and this year it’s questionable if I’ll even top $500.
“People love to ask the question “What would you do if you won a million dollars?” Most of us won’t really need to answer that question…”
Actually, I’d suggest you take that question seriously. And answer it thoroughly.
I never really did, until I realized my goal of selling my business for over $1 million, and then had a lot of “OH SH*T” moments as I realized I needed to suddenly understand a LOT more about investing and saving.
Also, I cried for weeks. This may have been compounded by the fact that I was suddenly no longer working and felt like I had no purpose in life.
A lot of people think it’s all rainbows and sunshine when you come into a lot of money. It’s not. Also, others think you can just pay someone else to take care of it — something else I’d never recommend. (I did pay an accountant to figure out my tax situation, which suddenly became a lot more complicated.)
Fortunately, I love to read, and investing and money management became a passion of mine and led to my blog and me putting on a personal finance conference last year.
No regrets, but I do understand now why most blow it. It’s a heck of a lot easier to just go out and buy a bunch of consumer goods than to suddenly figure out the inner workings of the stock market, bonds, real estate, and the numerous other investment choices out there.
Not to put a damper on it or anything — I enjoy having money — but people really need to take this scenario far more seriously.
-Erica
I never really thought about that. Random income always went in to what I call the “general fund” (really just a checking account), where everything that is not spent gets saved. My spending is quite stable and unrelated to the income as it is, or perhaps rather was, quite a bit lower so I could retire early.
Any sort of extra one time cash I get whether bday or otherwise I try to have a plan. It’s usually more into a fun savings plan like a vacation I would like to save for in the future. It’s extra money, it should go towards something fun.
Just had to deal with this! Got an insurance check for hail damage on a vehicle that really isn’t worth it to me to fix (a farm truck) as it is only cosmetic and we won’t ever sell the truck as it is paid for and a work-horse. I went out and bought a new bicycle that I really *wanted* but didn’t really *need* although I did justify it by saying I am handing down my other nice bike to my daughter. And I am going to be making more 20 mile trips to town, now that I have a cross-bike instead of just a road bike. Yeah yeah, I am not sure I am even convincing myself!
Great article. I worked a 2nd job for a year to pay off $18,000 in (mostly) unforseen debt (part of which was a whole new roof). ALL my income from that second job went towards paying of the debt. Once it was paid off I gave up the second job because I felt it was important to have some quality time with me, my friends and family. Anyway, I still do occasional extra work and I usually split the income between different ‘goals’ but it is random. I like the idea of having a specific percentage. It removes the scrutinizing and analyzing, and makes it really straightforward. And straighforward always works best for me.
That title was rather shocking, but it led to a great post about allocating and planning how to spend windfall money. We read a lot about how to save and budget, and how to use a cash reserve to get through the “down” times, but not so much about how to deal with the “up” incidents in a way that doesn’t financially destabilize us in the long term.
One thing I try to be mindful of is purchases that commit me to ongoing payments, such as cell service contracts or gym memberships. It’s possible to spend a windfall in such a way that I not only go through the money, but end up with less discretionary income because I’m committed to those payments a long time.
Great Post! Nicely presented.
i also loved the bait and switch with the title. Shocking title leads to common sense article about planning ahead! Nice one!
I love the idea of using percentages to know where unexpected money goes. I am going to start using this idea on my pay checks too since my check is extra since we “try” to live off one paycheck.