Now Would Be a Good Time to Start Paying Yourself – what to do with that recent raise or bonus

This is the time of year where you may have a debt hangover from spending too much during the holidays (you just didn’t want to listen to my advice in Just Don’t Do It!! did you?). Anyway, you live and learn – it is only a mistake if you fail to learn from it. It is never too late to regain the focus.

This might be a good time to rethink your saving/investment plan since you may have recently received a raise or bonus or expect to in the coming months. This is the easiest time to start or increase your allocation. You are (or should be used to) living within your means at your current pay level. You can allocate all, or a large portion, of your raise/bonus to saving/investing.

Remember, as shown in the sidebar, my fourth lesson to live by is to “Pay yourself -- save 10% of what you make”. In my opinion, this is the bare minimum to be financially prudent. If you have lofty goals such as retiring early you will need to do a whole lot better than that. How do I know? Because my husband and I had such goals and we achieved them! From our mid-30s on we directed probably close to 80% of our raises and bonuses into our investment portfolio. Sounds draconian but it did enable us to retire before we were 40. Saving this much had two important outcomes. First, it has put us into a position of being able to afford anything we want. Second, since we got used to being cautious consumers, we became less materialistic and decided that we really don’t need to have the hottest new car or biggest house – thus making the first goal much easier to achieve!

Life is all about making choices. If you recently received a raise or bonus you have a choice of what to do with it. Reward yourself by keeping it. Your plan might be different depending on your financial position.

1. If you have credit card debt or upside-down loans, use this found money to pay it off.
2. If you haven’t started a saving/investment account start it. You may want to read (or reread) my post Just Do It on how to start saving.
3. If you already are saving a percentage of your income, increase the allocation. My post Chomping at the bit? – how to start an investment portfolio might help you with this.

The best way to make sure you follow through on your intent to save this raise/bonus is to set up an automatic electronic transfer from your checking account for the same day (ok, maybe the next day) that the funds will be coming in. That way you can make sure that the money doesn’t tempt you to do something foolish. If you are not convinced, think about how the government gets its taxes. They don’t give us the “choice” to pay these taxes – the money is taken right out of our paycheck. Most of us soon learn not to even count this as our money (a topic for a whole separate conversation!). If it works for the government, why not let it work for you.

Sure you might want to take some portion of the funds and blow it on a cool new toy or entertainment. Just make sure that you don’t overdo it. My experience is that the “high” I got from watching my savings grow was much better then the temporary buzz I got from spending it on something that I didn’t need and didn’t last. When you think this way, you are well on your way to achieving financial independence.