Increasing your income whether from a promotion, raise, side hustle or business is an amazing feeling. It’s hard to deny that having more money to work with on a monthly basis doesn’t feel a bit freeing – especially if you’ve been struggling. However, if you’re not careful that income increase can lead to some big budget imbalances.
If you’re lucky enough to find yourself with an income larger than you’re used to, here’s what to do.
Rethink Your Financial Goals
As my income has increased over the years I’ve had to rethink my financial goals several times. I ultimately came to the decision that while my income is up I’ll allocate more toward paying off my mortgage.
This is currently my only debt and I know that if the mortgage was paid off either myself or my husband losing a job wouldn’t be a burden for us. (It wouldn’t be fun. But it wouldn’t wreck us either.) By focusing on this goal I’m setting myself up for financial success in the future.
We do still save for retirement, our kid’s college savings and emergencies but most extra money goes toward the mortgage.
I want to encourage you to adopt a similar train of thinking. Paying off your mortgage might not be the goal for you but what things can you focus on that will improve your financial situation and set you up for success if something unexpected happened down the line?
Paying off debt, establishing a decent savings rate and saving for retirement are always good options. (Although these definitely are not your only options. Do what feels best for you.)
Allocate Extra Funds Accordingly
Once you have those goals thought out pull out a sheet of paper and jot down a plan. Decide exactly how much money you want to go toward your financial goals.
(Hint: It doesn’t have to be ALL of your extra income.)
If you normally stick with a rigid written budget then rewrite your budget with that extra income included. If you’re like me and prefer to automate and abide by a loose budget then go ahead and set up your automatic withdrawals to reach your financial goals.
Is It Okay to Spend More Money?
Absolutely! There’s a time and place for frugality but if you’ve found yourself with more wiggle room in your budget and you’re still meeting all of your financial goals and obligations there’s no reason not to spend a little money on yourself. (Unless you hate spending money, which is cool too.)
In the personal finance world it’s easy to feel guilty about spending money on the things you want rather than only the things that are essential. But a big part of being balanced is spending on the things that bring joy to your life.
While you shouldn’t go crazy and spend every last dime of your extra income on wants, it’s definitely okay to budget a certain percentage of your income to spend guilt-free on whatever your heart desires.
Keep it in Balance
If you’ve been good at managing your money before your income increase then there’s a high probability you’ll do just as well managing what you have now.
The best thing you can do is spend the money in accordance to your own personal priorities. If you have big goals you want to hit there’s nothing wrong with funneling all that money toward those goals. Likewise, if you’re ready to spend some of your hard earned money on things that bring you joy then that’s okay too.
Keep your priorities straight and managing your increase won’t be hard at all.