Congratulations, you've got "extra" money!
If you’re reading this that probably means making some headway in your debt elimination process.
You've got extra budget money, awesome! Keep up the good work!
This likely means you’re selling stuff, doing extra work and cutting non-essential things out of the budget.
You’re following the “8 Steps To Erase Debt”, great job!
This is the point where you may start having “extra” little bits of cash coming in and in various forms.
Great feeling right? Yes it is a great feeling, but please don't get too excited and go spending it, though.
The immediate decisions you make about those extra dollars will directly impact how fast you get out of debt.
And, especially since this debt elimination process is a behavior retraining/modification process, we want to make sure we’re shining a light on any financial behaviors that approximate our “old self” and eradicate them, quickly.
The "rush to spend" any extra money is typically one of “those” behaviors we're trying to change and we want to make ourselves accountable to NOT do that.
Extra money. Yes, please!
By the way, here are the 8 steps if you're either new or need a refresher:
0. Stop All Retirement Investing (Until Step 4)
1. Build A Budget
2. Starter Emergency Fund of $1000
3. Eliminate Debts Smallest To Largest (a.k.a The Debt Snowball)
4. Full Emergency Fund of 3-6+ Months’ Expenses
5. Invest A Minimum of 15% Income Into Retirement Accounts (and increase savings rate to 50%+ if possible)
6. College Funding (if applicable)
7. Pay Off The Home Mortgage
8. Build Wealth, Serve, Be Ridiculously Generous And Prepare For Financial Independence (FI)
So, where should these new "found" dollars go?
Great question and here's the answer:
1. If you're still building your $1000 emergency fund, they will go there.
2. If you've got your $1000 emergency fund and are now working your debt snowball, throw those dollars at the particular debt you're currently working on (remember smallest debt to largest debt regardless of interest rate).
3. If you're finished with your debt snowball and working on your 3-6 month emergency fund, that's where these new found dollars will land. We want you to be prepared to combat any major emergencies that could arise and therefore send you right back into debt.
4. Beyond the previous three scenarios, you would want to look at all the irregular expenses in your budget and make sure you're fully funded for any upcoming irregular expenses. Irregular expenses are things like seasonal clothing, bi-annual insurance premiums, car registrations, etc.
If you're having trouble budgeting for these types of irregular expenses, here's more about how to do that in this article about budgeting for irregular expenses.
As always, with this new found money comes the temptation to spend it by not putting it into a budget category.
The urge to “leave this extra little $20 out of the budget” or to stash that unexpected $100 windfall for something like a "restaurant emergency”, is an ever present thought.
I want you to resist the temptation to do this and instead to put every single extra dollar back into the budget.
Here again, we're going to beat the drum of "behavior modification" in this process.
You must develop habit of taking that fearless inventory of every dollar coming in and every dollar going out if you ever want to win with money.
Don't cheat yourself. Focus on one step at a time...
Why do I want you to do this with any and every "little amount" of new found money coming in?
Because, as innocent as it may seem to "just do it this time", you’re really cheating yourself.
If you think about it in terms of old habits you're trying to kill, it makes sense.
When you "cheat" like this, you're just continuing a slightly modified version of the behaviors that got you into your current mess in the first place.
Remember, we want to constantly take a fearless and ruthless inventory of both our attitudes about and practices with money.
This is also why partner accountability is really important.
You HAVE TO hold each other accountable to not cut any corners and to really surrender to this debt elimination process to gain traction and ultimately to win.
So, make sure that every “extra dollar” that comes into the household gets put into the budget. Don’t just let money come in and not be accounted for.
Give every dollar a name and a job and you will immediately feel like you have more of it. You'll feel like you got a raise.
Again, I acknowledge that it’s tempting to just hold some of this new found money outside of your budget to maybe spend on something "fun", especially since you might be starting to feel a little fatigue from all of the effort.
You're selling stuff and maybe doing some side hustles to bring a bit of cash and it may start wearing on you a bit, but don't let that side track you.
We'll talk about what do do with "budget fatigue" a little later on. For now, just try to keep your eyes on the prize...
All this extra cash is where you really start to turn up the heat on paying off your debt.
So again, make sure you’re adding all of those new dollars to the budget, preferably to the debt reduction category.
The more dollars and sooner, the more you’re going to like yourself later, I promise.
So whether it’s $10 or $500 that comes in outside of your normal after tax income, make sure that it “gets put to work” in that budget.
Like I said, preferably this will go into the debt reduction category, but you may just be starting your $1000 emergency fund.
Either way, beginning the discipline of adding that extra dollar to the budget is a habit that will pay huge dividends down the road, especially after you’ve eliminated all of your debt.
Such are he habits of millionaires and we'd like for you to become one.
Get out of debt, but don't kill yourself doing it.
"Budget burnout" can be a very real thing when you're going through this process.
It's an intense process for sure.
If you don't yet know how grueling it can be, you soon will. It's hard, but there's no need to totally burn yourself out.
If you need some relief, rather than cheating and leaving money out of the budget, go ahead and budget in some "fun".
But don't go crazy with it. Remember, you're not out of the woods yet and we need to stay focused.
But, if a trip to the ice cream shop or a fancy burrito provides a "cure" for your temporary budget blues, it's okay to do that once in a while.
Just try to hold off on any perceived "luxuries" as long as possible without causing a nervous breakdown or a divorce.
The interesting thing about this debt elimination process is that your whole mindset around spending money on entertainment should really incrementally start to change.
What good is going to Disney World really going to do you if you come back home to a giant Visa bill that prolongs your debt servitude? Was that binge really worth it?
0. Stop All Retirement Investing (Until Step 4)2. Starter Emergency Fund of $10003. Eliminate Debts Smallest To Largest (a.k.a The Debt Snowball)4. Full Emergency Fund of 3-6+ Months’ Expenses5. Invest A Minimum of 15% Income Into Retirement Accounts (and increase savings rate to 50%+ if possible)6. College Funding (if applicable)7. Pay Off The Home Mortgage8. Build Wealth, Serve, Be Ridiculously Generous And Go FI (Financial Independence)!