We all know the feeling, you just checked your bank account and your eyes light up. You’re not used to seeing that new number with all those extra zeros. A rush of adrenaline runs over you and you feel as if you can indulge in anything you want.
But, not so fast…
Whether you’ve just gotten a raise, inherited a large amount of money, or simply started a side-job for extra cash, coming into more money than you’re used to can be a very exciting thing. There are many ways it can happen, but there are also many ways you can lose it all.
Here are the steps you need to take before reaching into your pockets so that you can protect yourself and make sure you make the most out of your money:
Think about the future.
Before you go around spending all your extra money (which, I know, is very tempting), make it a point to take steps to secure your future. This means making sure your retirement savings are on track and building a solid emergency fund which can cover at least 3-6 months’ worth of expenses.
Most people know how important these are, but aren’t sure how to practically go about them. There are many ways you can save money for retirement or an emergency fund; however, one of the most lucrative ways is through investing.
What should you invest in? Well, that depends on who you ask. But, you should attempt to educate yourself on how to invest and maybe even work with a financial advisor who can guide you. There are also many online investment tools available today that are making investing easier than ever by automatically creating diversified investment portfolios based on your personal risk-tolerance and financial situation.
If you’re not very experienced with investing, don’t go for high-risk investments from the start. Rather, try to find a mix of both low-risk investments and higher-risk ones, or stick to low-risk ones only; the only disadvantage is that you won’t stand to make as much money as you would with a higher risk investment, but at the same time, you have the peace of mind that your money is safe and sound.
Pay Yourself First
Many financial professionals advocate for the “pay yourself first” method.
Basically, the first thing you should do when you get paid is put a certain percentage away in an account you wouldn’t normally look at.
You should know exactly how much you’re earning and how much extra money you’ve just come across. Decide how much of it you’ll want to save and invest monthly, and then create a budget for the money that’s left. This way, you won’t go overboard with your remaining expenses money either and need to tap into your savings.
Also, your savings will be tucked away in a discrete account that you’ll probably forget it was ever part of your income. That is, until you check your account one day and feel accomplished for how much you’ve been able to accumulate.
Do the math
Before making any spur of the moment luxury purchases, do the math, diligently. Don’t overextend yourself on big purchases like a home or car, no matter how tempting it might be to do so. Housing expenses should be no more than 30% of your gross income, and cars should be 15%.
If you’re interested in splurging on something like a new car, that’s okay. It doesn’t mean you have to overextend yourself. By doing the math, you’ll be able to determine exactly what type of car you’re able to afford realistically. This means not just looking at the ticket price, but also taking into account the extraneous expenses that are involved with such a big purchase. For example, buying a new car comes with:
- Gas expenses
- Car insurance
- Inevitable repairs
- Oil changes and tire replacements
Only after doing the math on all the above elements and factoring them into your personal cash flow analysis, can you make an informed decision about whether or not you can actually afford that shiny new car. Or, if you’ll have to cut corners elsewhere in order to make it happen.
By implementing these practices into your daily life, you’ll eventually turn them into a habit. And, good habits are what set you up for financial success. What’s more, the sense of accomplishment and peace that comes from knowing you are in control of your finances is truly priceless. Especially, when it comes to knowing exactly how you’re going to intelligently allocate your extra money and maintain a financially balanced lifestyle.