Thursday, November 5, 2015

Balancing the Bonus (or other windfall)

It's that time of year where you might get a bonus! Or money as a gift. Or next year, a tax refund.

In such situations, I prefer the 1/3 windfall rule I learned from The Debt-Free Spending Plan: 1/3 towards debt, 1/3 towards savings, and 1/3 towards something fun or even frivolous. I like this method because it means you're not blowing it all, nor are you "being good" with it all. You get a little closer to your financial goals and still get to treat yourself!

Since I'm now consumer-debt free, however, I don't use that exact rule. Instead, I use 1/3 towards my Emergency Fund, 1/3 towards my Car Purchase category (to stave off future debt), and 1/3 towards something fun - usually my theatre tickets category, but sometimes retail therapy. I opt not to put it towards my student loans because the interest rate is so low, I'm better off saving myself from a future car loan.

If you have more than one kind of debt, the 1/3 should go towards the one with the highest interest rate. If, however, it's enough to pay off a debt completely at a lower interest rate, by all means. Or if you could pay off a debt completely using more than 1/3, then go for it! Then split any remains evenly towards savings and fun.

Even if it's a relatively low amount left for fun, enjoy the game of getting the most bang for your buck: a manicure, a bottle of wine, even a latte! Something that feels completely indulgent to you that you can enjoy debt-free.

I know that many implore treating any debt as an emergency, but it was important for me to be able to give myself these little treats every so often to maintain a debt-free lifestyle. Further, growing that savings is just as important to living debt-free.

If you haven't yet gotten off the paycheck-to-paycheck cycle, the savings should go towards getting yourself a month ahead. First goal: $1,000. Then, a month's worth of expenses. Then another. 

If you don't have any debt, congrats! Consider investing 1/3 in something like Betterment. Or put 1/3 towards a savings category that will help you avoid debt in the future, like your kids' education (in which case, it should go into a 529), a down payment towards a house or car, or a potential large purchase in the future (like replacing your fridge, computer, etc.).

Windfalls are great for making progress towards your goals, and should also be enjoyed!

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