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Monday, February 18, 2008

Dealing With Budget Windfalls



Some of us have irregular pay involving bonuses. These are often based on cryptic calculations that involve the Mayan Calendar and a jar of Mustard...In other words you can't count on them. Sure you might have a pretty good idea, but it is hard when you are expecting one amount and another comes in.

Many with this sort of Bonus don't budget it even though it can be up to 30%+ of our pay or we budget at the lowest imaginable payout. The reason is the last thing you want is when you finally get the check to be disappointed. I have been there. One time I was sure my bonus was going to be $10,000 based on the previous year. When I got the check it was less then $5000, still a great amount...unless you wrote checks or planned out more!

This post came up because I was reading a favorite Blog "Paid It Down and Moving Forward" by Sharon. She and Hubby received his Yearly bonus and she is now Consumer Debt Free (Way to go Sharon!) and well better funded in their Emergency Funds. They also bought one thing; A Dell laptop. A very nice purchase to help her with her Blogging and other needs. While she didn't get beat up her readers, I have seen others that have been, with statements like, "You aren't Serious about getting out of debt!"

Here is what I suggest about these, windfalls be responsible...to a point! Remember, these aren't gift, this is part of your pay. You basically have had it held until the end of the year. You haven't been able to spend or invest it or pay for any little extras. I like to look at every bonus in three buckets; Near-term, Medium-Term and Long-Term. I try to get about 1/3 to each bucket as well.

So this process begins when you are doing your yearly budget. What are you expecting to get? Not the best case but not $0 either. Then I look at what yearly bills I have. Will the bonus cover that? What is it doesn't? In our case, Property Taxes and Christmas. My bonus should cover those, but in case it won't I plan out how much per month I need to put into achieving that amount and pay towards it. When/If the Bonus arrives I fully fund it.

When the money arrives I fund those yearly bills first, then I look at my near-term needs. Any Bills that is would help to either catch up or get ahead on? If so I do that. Next-up, I start working, or reviewing my Baby Steps. Is my initial Emergency Fund fully funded? Do I need to catch up on any bills that aren't urgent, but are important, like car repair, new tires, etc..

After that I jump into the big pool of Baby Step #2, paying off consumer (non-mortgage) debt. If, and only if, that is all done, I suggest getting something that is in your "Would be nice stack." I would put a limit of no more than 5% of the total, it can even just be part of a uber-vacation fund you are saving for! The reason is that If we don't treat our selves every once in a while we will blow it big time at some point! Like a good diet that Ice Cream Sandwich won't kill you once a month or so...every night though...

Beyond that I would suggest you work the rest of the Baby Steps!

So Here is that Order Again:

  • Yearly Bills
  • Near-term needs
  • Emergency Fund Baby Step #1 - Initial Emergency Fund
  • Important, but not urgent bills - Tune-up, Car Repair, Piano, etc
  • Baby Step #2 - Pay off as much consumer debt as possible
  • Get something that is in your would be nice list - Not to exceed 5% of bonus Total
  • Baby Step #3 and Beyond...

I am not a financial council. I am just someone who has had a lumpy income for the last eight years and made all of the mistakes you can! Windfalls don't happen everyday! Go get advice if you want it. Just get out your Success Map, Budget and work your Money Management!

Congrats again Sharon, I loved this line from her Blog, "while it's WONDERFUL to be cc and car loan free, we will not lose focus and will continue to SAVE. We will NEVER, and I mean NEVER have credit card debt again."

Don't forget to sign up for my email RSS feed for a chance to win some great software from FruitfulTime, a $50 Value!

15 Comments:

Fiscal Musings said...

One guy at work has already planned to go to Vegas and blow his entire bonus. Simply astonishing.

RacerX said...

Wow...I know guys like that to. The same one come back and say how they got comp'ed all this great stuff, but could have bought the same stuff for a lot less!

Mrs. Micah said...

I could see not saving for vacation and then planning your vacation based on your bonus. But otherwise I think the best thing to do is use it like anything else.

Qualifier: Unless it's something really dependent on your individual performance. In that case, put aside 20% or so to spend on whatever you want.

RacerX said...

Most have a range that they pay and part ofthat is performance. To you point this is not far off how I would handle any money coming in, outside of fully funding my medium-term bills(like property taxes).

Thanks for visiting!

Sharon said...

Racerx,
I'm very flattered to be mentioned in one of your posts. You are very kind. I, as well as my husband, felt that if we paid off the consumer debt, and the car loan debt, there would be PLENTY of money left over for the stuff we never had money for before, i.e. vacation, Christmas. In past years, we have taken his bonus (usually around 10%) and put it in the vacation fund, and christmas fund and watched it "disappear" into bills that we weren't prepared to pay. So when Christmas came around, the funds were not there, BUT the ccs and car loans still were. We are happy with our decision, but I cannot lose focus on how we had gotten there in the first place because I never want to go back again.

P.S. My laptop came today!!!!

RacerX said...

@Sharon - You two made the right decision for YOU! No one could ask more! Looking forward to seeing more and even faster comments with your new Laptop! w00t for you!

Thanks as always for visiting!

Debt Dieter said...

Interesting, I'm due for my annual bonus in May & this is pretty much exactly how I'm going to use my bonus, paying off as much debt as possible & funding my emergency fund up to a full months salary.

RacerX said...

@Debt Dieter - I removed your dupe comment, but that sounds great! That really will get you staying on the right path!

Thanks for commenting!

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