Help me avoid spending like a sailor on shore leave

August 5, 2009 2:09 PM

What are some tips on wisely handling an increase in income?

I know - good problem to have. Recently I switched positions and am now making about 150% of my former salary. This is great news, but because of my financial history, I want to be careful about it and use this newfound income smartly.

I'm carrying credit card debt, so my highest priority is to use most of the new income to pay that off. I'm setting the goal of doing that within two years. But even at that rate I will still have a bit more disposable income than I do now. I'm worried that I'll fritter it away because I can - after several years of skimping on the basics, there's a temptation to loosen the purse strings a little and buy more things on impulse, eat out because of laziness, and that kind of thing.

I'm having a hard time deciding on budget line amounts for things like clothing (I haven't had a new winter coat in ten years, and need shoes), groceries (right now I average around $50 a week, but would really like to spend a bit more so I don't face Rice Days at the end of each pay period), and entertainment/recreation -- right now I spend about $50/week on nonessentials like eating a meal out, having a couple of beers, going to a show or a fair, or renting a couple of movies. I don't own a home, and one day might like to, but saving for that would come after debt repayment. In general I value experiences more than stuff. I really like feeling secure and look forward to an increased sense of financial preparedness.

This new income could make possible things like taking classes, participating in sports that require equipment buys, traveling a little more, etc. I'd like to take advantage of some of that purchasing power to experience things I've missed out on - but how can I do so responsibly and in good conscience? What boundaries should I set?

I'm very used to stretching a meagre budget creatively - but as a result, I know a lot less about managing money that you have enough of than money that's always a teeny bit shorter than you'd like.

I will be setting aside an employer match for retirement, doing a debt snowball, and starting a savings account with auto deposit. What else should I consider? Have any of you managed such a change? What helped you set spending boundaries? How did you determine what was reasonable?

posted by anonymous to work & money (19 comments total)

Previously.
posted by applemeat at 2:16 PM on August 5

A good boundary might be, "Will I be glad I paid for this item in one year?" If so, go for it. So travel, wardrobe staple pieces, a laptop, etc- get the good stuff. Skip the $5/day latte habit and the 20-year old Scotch.

I'd say keep 10-20% of the raise to add to your weekly budget so you can eat real food and buy some clothing- if your "food n stuff" budget is $100/week, for instance, maybe go up to $125 or $130. But don't eat all caviar all the time- allow yourself to splurge treats, especially good treats with lasting impact, like a new coat, and stay reasonable on the one-time expenses that don't add up to anything, like expensive alcohol and gratuitous cab fares.

Begin making double your debt payments if you can (ie, don't pay the minimum on your credit card- at least double the minimum, more if you can. Lump sums like $300 per paycheque is even better).

Then, save ALL the rest of the raise- pretend it doesn't even exist. If possible, get your company to split your weekly cheque and deposit the extra cash straight into a high-interest savings account. On "big deal items" like a new laptop or a major trip, you can dip from this account. But stay out of it for short-term spending like rent or food or toys.

Congrats and good luck!
posted by pseudostrabismus at 2:26 PM on August 5 [1 favorite has favorites]

I'm carrying credit card debt, so my highest priority is to use most of the new income to pay that off. I'm setting the goal of doing that within two years. But even at that rate I will still have a bit more disposable income than I do now.

Pay it off faster, if you can afford to. Your debt is costing you, what, 15%? So paying off that debt is like making a guaranteed investment that pays you 15%. A savings account will pay ~1%.
posted by Dave 9 at 2:28 PM on August 5 [4 favorites has favorites]

I'd focus on paying off your debt, yet living as though you still made your old salary. Then, once the debt is paid off, you can raise your standard of living a bit but still put a hefty chunk of it into savings/investments, and stick to it. If you never had it to spend to begin with, you won't miss it.

I think $100 a week is pretty generous for entertainment/groceries combined, but I'm way underemployed. I'd kill for $50 a week for drinks and movies! If you're happy with that, I'd say keep that right there. If not, raise it $10 or $20, but that's it! Try not to be tempted to eat out all the time.

As far as new clothes, traveling, etc...Maybe give yourself $X a week to spend on that stuff. Keep track of it via online banking (if your bank allows that), or even just a text/excel file. Without knowing your salary, I can't give you a number, but it'll add up quick. I have a friend who would literally put cash in an envelope in her dresser every payday, and then when she wanted to go shopping for clothes, she'd take only that cash. She was never at a loss for cool clothes. And if you're in the Northern Hemisphere...do you really need a new winter coat now? Save up a few bucks each payday for the next few months and you'll buy yourself the coziest winter coat ever.
posted by AlisonM at 2:28 PM on August 5

Congratulations, definitely a good problem to have!

It's imperative that you stay modest, but you must understand that the costs of your time vs money have changed: behaviors that used to be cheaper in the past-- say, eating ramen or ironing your clothes at home-- might not be optimal any longer. Having healthier meals will allow you to have more energy at work, and dropping your pants off at the dry cleaners will free up much needed time and energy.

Also, continue improving your situation. You're clearly a smart guy/girl if you can increase your salary the way you have-- why not increase it even more? Keep some money in reserve, but in general, spend less time worrying about little expenses and instead work towards increasing your income by another 150%.
posted by gushn at 2:32 PM on August 5 [1 favorite has favorites]

I think it's really, really good that you value experience over physical objects.

The best advice I ever read was to spend well on things you use every single day and save everywhere else. (This may have been previously on Ask MeFi.)

But it seems the most important experience for you, right now, is to feel "secure" and I think that should be your priority—not classes or sports. Make live easier for yourself, not necessarily somehow "better."
posted by trotter at 2:34 PM on August 5

What I've done to attempt to stave off "lifestyle inflation" is have periodic transfers set up from the bank account where my check is deposited (interest bearing) to another account that I use for expenses. The transfer amount stays flat while the deposited amount goes up with raises, etc. The remainder (what's not transferred out to the expense account) is used to build up savings, or in your case, pay off debt.

Just a little trick I've used to make myself think I've got less than I actually have. :)
posted by jasondbarr at 2:58 PM on August 5 [1 favorite has favorites]

With the first paycheck, do something fun.

After that, pretend like you're still making the same amount of money. Use all of your new income to pay your credit card debt. The faster the better.

Once you pay off your credit cards; figure out how much you want to save. Open an add-on CD (which you can't touch without a penalty) with your bank and set it up so that a certain amount gets automatically taken out of your checking account on your pay day. (I'm assuming you have direct deposit.)

Spend on stuff like travel, clothes, pragmatic electronics. Stuff you'll remember/be glad you did far after the fact.
posted by spaltavian at 3:10 PM on August 5 [1 favorite has favorites]

Well, make sure you're maximizing your 401(k) and/or IRA contributions for the greatest tax benefit and/or employer match. That's money for 20-40 years from now and the more you put in sooner the bigger it will get. Note that these can be used for first home purchases.

Then maybe you want an emergency stash to cover 2-3 months' expenses. Build that up, just in case, because the recession is ongoing and you never know.

Then pay off the credit card debt using a PowerPay/debt reduction calculator such as the Dave Ramsey snowball method or the largest first method or the highest rate first method.

You could definitely ease up on the food budget, especially if it keeps you from developing a habit of eating out, whcih is tons more expensive. But mainly you want to "pay yourself first", by putting money out of your grubby hands' reach -- into retirement, or CDs, or whatever.
posted by dhartung at 3:11 PM on August 5

Here's what I do:

Take 10% of the extra money and have fun with it.

Take the other 90% and split it between paying off your debts and building a savings. The exact split is gonna depend on how much savings you have versus how much debt, but it's really important to have some cash on hand if you don't already (people saying to put 100% into paying down debt are wrong). If something bad happens to you, you want to have cash -- you can't rely on cash advances or just charging things because credit card companies have been aggressive about cutting limits and canceling cards without warning lately.
posted by meta_eli at 3:54 PM on August 5 [1 favorite has favorites]

Read through fellow Mefite JD Roth's entire blog, "Get Rich Slowly."

It would be helpful to know $$ here and your relative job security, but for me, I'd roughly increase my budget 30% for food, taxis, clothes, etc. And divvy 35% for savings and 35% for debt until you have a reasonable emergency reserve. When you do, I'd pay 70% to debt repayment and be done with it. I'd be extremely vigilant with setting and tracking my budget.
posted by semacd at 4:11 PM on August 5

Plan out your saving and make it automatic. You likely have an employer savings plan to consider. Plan on monthly savings at least enough to max out any employer match. I really don't know how much to save for retirement; I'm young enough that my IRA is mainly for mortgage downpayment.

Probably, I'd put credit card debt on a more aggressive payment schedule. It's high interest debt, and saving the difference into a low interest savings account appears silly to me. You might worry about not having enough money in an emergency, but I'd argue that's a use case for having open credit card accounts. One word of caution: don't close out your oldest credit card. It's a substantial benefit on credit scores.

When I started having more money around, I got bank statements as far back as I could and put it into a financial planning program (I use GNUcash, but you may prefer Quicken or something else). Budgeting via meditation doesn't work well, but I can get a good idea of historic spending patterns this way. Monthly reports for X dollars on rent, X dollars on car insurance, food, utilities, video games, etc. It also lets me track assets and liabilities, like my student loans and investment portfolio. It's a lot of up front work, but I think the commercial programs have classifiers and online connection tools to speed the process up. Now, when I get the statement in the mail, I just type it into GNUcash and assign the appropriate income / expense accounts.

I don't use a credit card. I used to pay for everything via check, so I'm used to keeping track of how much money I have on hand. I use a debit card now, and keep enough in there to cover a month's worth of expenses. I do have a credit card account, but I don't carry it on me. It seems to help out with debt ratios and longevity of account.

If you're really worried about spending your way into the poorhouse, you're probably going to fine. But you might consider spending more on resalable assets than consumables and vacations. A slightly used coat fetches far more than photo albums. You can use something like Quicken to show you a total net worth and even plot it over time if you need a feeling of growing personal security.
posted by pwnguin at 4:21 PM on August 5

buy more things on impulse

To curb this I suggest two things, make saving automatic - as much as possible - get savings auto deposited into a savings/investment account via paycheck.

And two, have a "fun" payday, create a day every two months or so you can spend whatever reasonable ammount you choose on something frivilious, or something awesome that you just /want/. That way if you feel the urge to splurge, you have a date where you can look forward to spending without guilt.

g'luck.
posted by bigmusic at 5:49 PM on August 5 [1 favorite has favorites]

Mostly agreeing with everyone else.

Don't force yourself to maintain your former spendthrift ways 100%. That's a great way to psych yourself into wasting money because you convince yourself that you deserve it. You've upgraded your job, and upgraded your income. There's no reason why you can't knock out those one or two cheapskate things that you really hated most about being poor. Silly, but meaningful on a daily basis, kinds of things. Go back to brand name coffee. Upgrade those cheap 10 cent pens to nicer 50 cent pens. Etc.

If you reward yourself a little bit, you feel better about being responsible with the rest of your money.

(Also, start/recalibrate your retirement savings. Now is probably a good time to get in, and even though the current rate of return might seem like that money is better used paying off the CC debt, the fact that this money is going to be working for you for the next 10-20-30-40 years makes it well worth it to seed the account now.)
posted by gjc at 5:59 PM on August 5 [1 favorite has favorites]

Also, don't count that 50% increase until you see it in your paychecks.
Compare (what I now get):(what I used to get)
Use a calculator--I bet it is less of an increase than you thought.
Of course, some of that is money you will get back on your next tax return.
A clever person would realized that.
A smart person would disregard it--when that extra money arrives (next summer?), it can go straight to the CC debt.
posted by hexatron at 6:01 PM on August 5

If you are having the debt-service versus cash-building dichotomy, you might look at doing an amortization schedule kind of thing for the debt. Just for example, say you have an extra $1000 to use every month. Month one, plow the whole $1000 into the debt. Month two, $100 into savings, $900 into debt. And then $200 + $800. Build the curve in a way that maximizes your goals. But really knocking back the debt the first couple of months is a great way to reduce the total cost of the debt. Time value of money and so forth.
posted by gjc at 6:05 PM on August 5

You've got a good handle on this. Once the credits cards are paid off, keep putting the same amount into savings - some combination of tax-deferred, which tend to be unavailable, and an emergency cushion, which can be used without penalty.
posted by theora55 at 9:39 PM on August 5

I'm carrying credit card debt, so my highest priority is to use most of the new income to pay that off. I'm setting the goal of doing that within two years.

This strikes me as a bad idea. If I were you, I'd put all the new income towards paying off your debt, and not get used to spending any of it until the debt was gone. Then, build up a savings cushion. Then reward yourself with something nice, because you'll deserve it and be free and clear.

One thing that I think helps put debt into perspective is calculating exactly how much you're going to pay in interest, based on the payment schedule you have in mind. There are many online debt calculators that let you figure this out. I suggest strongly that you do this, and realize how much money you're burning up in order to have disposable income now.

It's good that you're not increasing your debt anymore. But every time you spend money on something non-essential rather than using it to pay down your debt, you're putting money down the drain in the form of interest. In other words: by not using the cash you have available to pay down debt principle, you might as well be borrowing it.

I hate to be a big downer, but every time you make a non-essential purchase while you still have debt, you should mentally add in to the purchase price of the item the interest that you'll have to pay because you're not paying down your debt with those funds. (E.g., at 12% and assuming $15k of debt on a 24-month payoff plan, a $1k expense today ends up costing you about $1300 total when you add in the finance charges you end up paying, which you'd avoid by putting that money towards the principle instead. Until you're debt-free, every purchase you make should be viewed through this lens: would you still buy it if the sticker said $1300 instead of $1k? If not, put your wallet away.)
posted by Kadin2048 at 12:06 AM on August 6 [1 favorite has favorites]

1) N-thing that if you are paying off your debt over a few years and you still have some left over, then you are not paying your debt off fast enough.
If you can, try and pretend that you didn't get a raise at all and throw everything at that debt. Why should the credit card company benefit from your hard work?? Deny them every penny of interest they think is coming to them. It's YOUR money.

2) Then, I would take some huge portion of the new money and save it in some way. I don't know what sort of investment, that's a highly personal thing. Trust me, as long as you don't do this with all the new money, you won't miss it.

3) Then you have your real "new" disposable income left. Well, figure out what's important to you. Have you wanted to travel more? Did you want to save to buy a house? Have you just wanted to buy a new pair of Manolos a month like Carrie Bradshaw? I think if you did 1 and 2, it doesn't really matter what you do with your money as long as you make a conscious choice about it.

I'm very used to stretching a meagre budget creatively - but as a result, I know a lot less about managing money that you have enough of than money that's always a teeny bit shorter than you'd like.

I think you know more about managing money than you think. You will always feel that you are a teeny bit short. But now you can feel like that with nice shoes and an impressive investment portfolio.
posted by like_neon at 2:10 AM on August 6