What on earth is “extra” money?

The current Woman’s Day magazine has an article talking about “extra” money and how it often gets “frittered away”.  I had to stop right there.  What on earth is extra money and how do I get some?

Well, it turns out that by “extra” they really meant unexpected, unplanned for or forgotten money.  Let’s break these down for a minute.

  • Unexpected money. This is the good stuff, the real deal.  The bonus you didn’t know was coming.  Maybe an inheritance or winning the lottery.  This is money you had no way to expect, and thus weren’t planning for in any kind of real way (though we all have the day dreams).

  • Unplanned money. This is most likely your tax refund.  You knew it was coming – maybe not exactly how much, but you still knew and decided not to include it in your plan.   If we’re talking about a tax refund, it was always your money, the government was holding it for you, and you just didn’t make it part of your plan.  I don’t judge those who get a big tax refund every year, and then use it for a family summer vacation every single year.  Why?  Because that’s a plan.  It’s a pretty poor savings account, but for some people it works and it helps them manage anxiety about having to pay extra taxes at year end.  But I will judge if you get a big tax refund and feign surprise and treat it like you won the lottery – getting your own money back is good but it isn’t “winning”.
  • Forgotten money.  $20 in a coat pocket. The refund that arrives in 8 weeks.  Guess what?  None of my coat pockets have $20 in them because I don’t forget $20.  Blame it on the budget.  If I take cash out of the bank I have to break out where I spent it in the budget.  This makes it really hard to forget money.  As for refunds, those go right into the expense lines in my budget – I never ever count them as income.  They aren’t income any more than a coupon is.  A coupon is just an instant rebate, and both are part of the justification on why you make a given purchase, not extra money.

It’s pretty clear I’m not keen on the idea that there is “extra” money.  If anything I have extra plans and I can always adjust my plan to include unexpected/unplanned money.

It all comes back to the budget (aka plan).

Let’s say I bought cat food and there was a $10 refund.  When I get the refund, it’s still part of what I spent on cat food and that refund goes in to the “cat” budget line as an offset to the spending part.  It means that I spend $90 on the cat instead of $100.  I treat it like a returned item.  If you bought a $40 dress and then return it, you don’t have $40 in extra income.  You have $40 less spent on clothing.  It’s a shift in thinking for some, but one worth making.

Now  – about that tax refund.  On the budget that is income.  It was your income all along; you just deferred it until you filed your taxes.  This income shouldn’t be treated any different than a paycheck, because it is a part of your annual pay. The difference is that you didn’t plan for it and so your budget isn’t reliant on this income to pay the bills.  That simply means you can use it to meet goals sooner than you had planned. Put it right in the income line of the budget and then make a plan for it.  If you are working on paying off debt, get there sooner.  Saving for a down payment on a house?  Get there sooner.  Retirement savings?  College savings?  A nest egg for a new business?  Don’t fritter – get there sooner.

Now about unexpected money.  There is something in our brains that derails our planning when we get a true windfall.  But here’s the thing.  The budget you are on right now (if you aren’t – try this one) is your plan.  This plan should have both long and short term elements.  Long term is why we have a savings section and short term is because we have right now, this month bills and expenses.  When you get a windfall (large or small) it shouldn’t really change your long term plans.  Most of us have the same money plans at a core level and what differs is what we are willing to do to get there:  (1) live debt free (2) be able to retire with no money worries.  So if you have truly unexpected money, the advice is the same as it was for the other unplanned money – look at your long term goals and get there sooner.

One exception, with truly unexpected money I am okay with the 90/10 rule – put at least 90% towards your long term goals and up to 10% towards something more short term (that means something more fun than an IRA deposit or extra mortgage principal payment).

One last thought – if you feel like reaching your long term goals sooner isn’t glamorous or exciting, you may need to re-frame those goals in your brain. Instead of the humdrum reality of paying off (for example) student loans sooner – get specific in your brain and imagine what you could do each month with the money that goes to those loans every single month now.  And paying interest bearing debt off sooner means paying less in total, so don’t forget how good it feels to keep money in your hands instead of putting it the lenders pockets!

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