One of the favorite things my dad would always tell me was that when I had money it was “burning a hole in my pocket.” And in some respects that was/is true. I remember using my allowance to buy toys, food, and games or other items. I don’t remember saving a lot of my money as a kid. I mean I had a savings account, but when I went to college I had enough money for spending money, but that was it. I never “paid” for college through jobs in high school or college. I got through college on scholarships, grants, and small amounts of student loans. I did save and pay for a trip to Mexico through working, but I still spent that money. I didn’t do anything long-term with that money. I didn’t invest it.
That is probably why I don’t like having a lot of money sitting around in a savings account. I have a compulsion for that money to be doing something for me. I think that a lot of people are like me. When they get money they tend to spend it. That is why I am advocate of automatically paying yourself first. Paying myself first I don’t even miss that money. It is gone and I know I can’t access it without huge penalties. Now if you are like me and you tend to spend money when you find it then you should not only pay yourself first as a general rule of thumb, but also earmark money for other expenses ahead of time, particularly if you have extra income.
In my case, summer is actually a pretty good time for my financial earnings because I can usually earn anywhere up to an extra 8-10,000 for the summer by doing advising, getting grants, giving lectures, etc. So the question is what do I do with that extra income? My answer is I earmark it for upcoming expenses that are on the horizon, extra savings, or paying down debt. For example, I know that within a few weeks I will get my property tax bill from the city. I know that my property taxes are probably going to be about $4500 (that includes cars….we have very high property taxes for cars in this city). So I could pay those taxes over a whole year or I could just pay them ahead of time. Since I know it is coming I have been saving every extra dollar of additional compensation over the past two months to pay for part of these taxes. Once some additional compensation comes in this month I should have enough money to pay for everything.
Once that expense is over then I think about where else I can put that money. Considering I have argued that a HELOC could be considered an emergency fund it might be a good idea to put some of this money to my mortgage or to my Roth IRA, which can also be a place I like to store emergency money. Last time, however, I stuck money in my Roth IRA I actually liquidated it to pay off some debt. If I do put some extra dinero in my Roth IRA this time I will make sure I invest the contributions. Because I have the mentality that liquidating any kind of retirement savings is the absolute LAST resort I know I won’t touch it unless it means we are getting thrown out on the street.
The Bottom Line: If you know that you have extra income coming in and are prone to spending it break the habit by earmarking it for a specific purpose. When I do that I know that I change my mentality and I am reluctant to use it for anything. It also curtails my spending, which is something that is even more needed than ever.
What do you do with extra income?