Reading Four Ways I Upgraded Out Of My Raises at Free From Broke, got me thinking about how our spending tends to grow into our income. I’ve known about that concept for a while now and have fought hard to resist it, but I’ve had a realization recently that makes this even easier. I’d like to share it with you, dear reader.
With all the talk about the economic stimulus payments that will be issued in the next few months, coupled with my own bonus and raise at work, I started to see things in a different light. Call it the reverse of the Pay Yourself First principal. The idea is a simple one – Spend no more than 15% of your windfall and save or invest the rest.
How It Works.
By spending 15%, you get the psychological effect of (short term) reward while still maintaining 85% of your found money to put to work in a high yield, online savings account or pay down debt or invest for the long haul (the REAL reward). It’s instant gratification AND long term reward – the best of both worlds.
The psychological factor is the key. I’ve been very disciplined in the past – I would jack up my automatic savings plan to match the amount of my raise, and I found is that this would work according to plan for a few pay periods. The problem for me was that it worked too well. The whole point was to act financially like I hadn’t gotten a raise and I’d be that much closer to my goals. The reality was that my financial self was more than happy, but the emotional (or human) side of me felt somewhat depressed that I hadn’t seen any of this supposed reward.
The Result Was Self-Sabotage.
I would over compensate by spending more. I spent less than my increase, but that amount would still be enough to cause a shortfall that would wreck all kinds of havoc on automatic money transfers and the like. In the worst case, it would cascade into a bank over draft fee at some point thus costing a lot more than the proposed 15%, and delaying the very financial goals that were supposed to have been reached quicker as a result of the raise!
You may think this 15% factor is not enough, or that you’d need to have a windfall of a couple hundred dollars at least, but that’s not really true. Sure, it’s a lot nicer when you’ve got a $1,200 stimulus check, but even small amounts work. For example, say you sold some “junk” you found in the closet on eBay or Amazon for $50. That 15% comes out to $7.50. Not much you say? Ah, but it’s still a cup of coffee and bagel on your way to work, or a discount CD, DVD or book. And the best part is you still have over $40 that you didn’t have before.
Sounds a lot like when you go on a diet. You count every calorie for a month and watch your weight like a maniac then you break and can’t take it and go eat whatever you find! You gotta have balance. Your plan sounds real good. You get to save and get a psychological boost.
And thanks for the link!
I’ve often thought there are strong similarities to diet and finances – most people view both as a painful part of life that they would rather not deal with. The irony of course is that dealing with them a little each day prevents conditions becoming really painful later.
Thanks for stopping by, FFB.
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