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How much has your annual income increased over the last five years? Try this exercise. Take a paycheck from last month and compare it with one from five years ago. Or, maybe look at the tax form you submitted this year and compare it to one from five years ago. If you’re like most people, there’s a noticeable difference between that past income and today’s earnings.
Now try this. Knowing how much your income has increased, where has that increase gone? How is your spending different today from what it was five years ago?
Many people would say that any increase they’ve had in income has been outpaced by inflation – and there’s some truth to that. But when pressed, most of us couldn’t identify specifically where that money has gone. We’re earning more, but we’re not making progress toward financial freedom.
A Little More Money
“A little more money will solve all my problems.” How many times have you thought something similar to this? “If I could just make an extra X, then I could do Y.” But now you’re making the extra X and Y just hasn’t happened.
Experience tells us that a little more money doesn’t really solve our problems. In fact, we tend to consume the extra that we make – and maybe a little more – in a pattern called “lifestyle creep”.
Lifestyle creep occurs when we automatically expand our lifestyle spending to incorporate increases in income.
Lifestyle creep isn’t something we plan – it just happens. We get that nice bonus, so we buy a new car (though the old one was working fine) – and maybe find ourselves scrambling a bit to make the payments. A raise comes our way, so we begin to go to nicer restaurants. These things aren’t necessarily bad, if they’re planned for in the context of an overall Spending Plan. But usually, that’s not the way it happens.
Do you ever daydream about what you’d do with extra money? Well, that might be a good start. Here’s a license to daydream but to take it one step further – to actually work it through. Instead of vague, “wouldn’t it be nice if…” kinds of daydreams, think through some “If God blesses us with more money, we will…” plans. A little more money won’t solve all our problems, but it can solve some of them if we’re ready for it and if we steward it well.
Handling Increase
If we’re going to be wise in the way we handle increases, then we need to start with being wise in the way we’re handling current income. And the starting point for that is a prioritized, working Spending Plan. It’s hard to know how to allocate additional income if we don’t know how we’re using the income we’re already making.
- Spending Plan: “If you aim at nothing, you’re sure to hit it!” This applies to our spending as much as it does anything else. Without a plan, we’ll be driven by the influences of our culture, our families, and our peers. And we won’t be heading in the direction of financial freedom.
- Prioritized: Our spending should be guided by a known, documented set of priorities and non-negotiables discerned in prayer (and agreed on with our spouse, if we’re married!). Without that, we might be spending and we might even be staying within the plan, but we won’t necessarily be pursuing financial freedom.
- Working: The spending plan needs to actually be working. And the only way to know this is to keep good spending records, comparing those records regularly with our plan to see where we might need to make adjustments (in either our spending or the plan itself).
One final note here: If our spending plan depends on increases in income in order to balance it, then it isn’t a working plan. Our plan needs to work today and not presume on the future (James 4:13-15).
Two Types of Increase
When planning for increases in income, we need to account for two different types of increase: windfalls, such as bonuses or tax refunds, that don’t occur monthly; and monthly increases, such as raises. We plan for these differently because they have different impacts on our overall income. Each one can be maximized in a different way. The important thing is to plan, without assuming!
Adjusting for Raises
We’ve mentioned elsewhere that spending plans are not set in stone. Circumstances change – and one of the happier changes is when our income goes up! If you get an annual raise, this is a great time for an overall Spending Plan checkup. Evaluate your spending plan against your spending records to see where adjustments need to be made. This should be an ongoing exercise, but in conjunction with raises it takes on special meaning. Here are a few areas to examine:
Giving, Saving, and Debt Retirement
One question that should always be asked when a raise comes is, How can I use this to increase my giving, saving, and debt retirement? These are areas that don’t typically scream for attention, but to the believer, they’re important aspects of stewardship. Unless there’s a significant need that’s currently going unmet, consider allocating the bulk of a raise to these three areas.
Spending Plan Accuracy – Category adjustments
Are you consistently overspending in a certain category or categories? If so, and if reducing spending in those places isn’t realistic, then consider adding some of your raise to those categories. For example, if you’ve budgeted $750 a month for groceries and find that, even being as careful as you can, you’re consistently spending $800 or more, then an adjustment is needed. Some of your raise can go to this category.
Of course, it’s also possible that in some categories you’re consistently under-spending. Consider those categories for adjustment in the other direction.
Spending Plan Completeness – Category additions
Are you finding that you have a somewhat large “Miscellaneous” category? It’s possible that you may need to break out one or more specific categories and plan for spending in them. It may even be possible that you’ve wanted to spend in a certain category (say, a health club membership) but haven’t had the funds for it. A raise is a great time to prayerfully evaluate those priorities and determine if some money should be spent in new places.
Again, it’s possible that you have some categories you don’t need and that money you plan to spend in those categories is actually being spent elsewhere. Adjust accordingly.
Example: Adjusting for a Raise
Here’s an example of how you might allocate a $200/month raise (note: this is for illustrative purposes only).
- As a believer, tithing is important to you, so you’re starting by tithing 10% of the increase ($20).
- You estimate that taxes will take about $40/month of your raise.
- Your doctor has advised you to start an exercise program for your health, so you and your spouse agree to join a fitness club ($40).
- You’re committed to paying off your credit cards as soon as possible, so you allocate the remainder ($100) to accelerating your debt repayment.
The Best Use
Here’s the thing. This is $200/month that you didn’t have before. You could simply spend it however you want to, or you could plan your spending to achieve key goals. And of course, you can adjust those plans if you see that something isn’t working (for example, the tax bill turns out higher than you thought).
The key question to ask is, “What’s the best use of the next dollar?” Or, in this case, of this next $200? Prayerfully look for the next priority and use the money there.
Suppose you only got a $100 raise? Assuming your priorities were the same as above, you’d tithe $10, estimate taxes at $20, spend $40 on the fitness club, and allocate the remaining $30 to debt repayment. The point isn’t how big your raise will be. The scarcity mindset would say, “My raise isn’t as much as I need, so I can’t accomplish what I’d like to.” But cultivate the abundance mindset: “I have $100 that I didn’t have before – what can I do with that money to honor God and pursue financial freedom?”
Planning for Windfalls
For our purposes, windfall income is any income (usually significant) that occurs infrequently or only once. Examples include bonuses and tax refunds (which may occur annually) and also one-time income such as an inheritance. Irregular commissions might be another source of windfall income.
Since windfall income is less frequent (and less certain) than regular income, it’s hard to incorporate into a monthly spending plan. But that doesn’t mean that it can’t be planned for in advance. Think through some of the possibilities:
Giving, Saving, and Debt Retirement
Windfall income can make a great contribution to key stewardship goals in the areas of giving, saving, and debt retirement. This is even more important if there isn’t much margin in the Spending Plan for these areas. Pray over:
- What would God have me do in the area of giving? Are there any special projects He has given me passion for?
- What progress could I make in retiring debt? Is there a credit card (or more than one!) I could pay off or significantly pay down?
- What key savings goal(s) could I accomplish? Could I fully fund the Emergency Fund or 3-month net, for example?
Major Purchases
If margin is tight, saving up for a major purchase like furniture or an appliance can be difficult. Are there any significant purchases you need to make that haven’t been in the budget? Using windfall income for these purchases can help you avoid the bondage of going into debt for them.
This could include things like a family vacation. It’s not against the rules to have fun with some of the resources God provides! Just plan for it in the context of your overall windfall income planning.
Monthly/Annual Bills
Some bills, such as car insurance, can be paid either monthly or annually. If the monthly budget is tight, consider converting one or more of these bills to an annual bill that can be paid with windfall income. That will free up money in the monthly spending plan for other categories. (Just be sure that you account for this bill in the following year!)
Example: Planning for a Windfall
In some cases, you’ll know the income amount before you actually receive the funds. For example, if you’re getting a tax refund, you’ll know how much it is before you actually receive it. In some companies, annual bonuses are communicated a bit before they’re given.
In other cases, you may not know how much you’re going to receive. So, you’ll want to be a bit open-ended in your plans. The key is to know beforehand what your priorities are. The following example is just an illustration.
- You set a priority of giving 10% of the income.
- Windfall income may or may not be taxable (tax refunds aren’t, for example!), so you may not need to plan for taxes. Also, with windfall income, taxes may be at a higher percentage than with normal paychecks. Be prepared for a deduction.
- You have a high-interest credit card with a $2000 balance, so you allocate the next $2000 to paying off that card (which will also help free up some money in the monthly spending plan).
- You’re planning a family vacation and set aside the next $1500 for that.
- You already have a fully funded emergency fund, so you determine to put the rest of the income into your 3-month net savings.
Let’s say that your windfall is an annual bonus of $4000. Here’s how this might look:
- $400 is given to a charity that the family agrees on.
- $800 (estimate) goes to taxes. That leaves $2,800.
- $2,000 goes to paying off the credit card.
- The remaining $800 is set aside for the vacation.
With a $4,000 bonus, you weren’t able to accomplish all that you had on your list. But the key is that you did satisfy the most important goals, based on your own priorities. By creating a plan in advance, you can ensure that you allocate windfall income most effectively, regardless of the amount of income.
The Lifestyle Cap
At the top of this article, we introduced the concept of lifestyle creep – our tendency to expand our lifestyle to use up any and all income increases we receive. And certainly income increases, especially early in our careers, enable us to move toward the lifestyle that we envision. But have we thought through what that lifestyle really looks like?
A Lifestyle Cap describes a standard of living that meets our vision for fulfillment and purpose.
A lifestyle cap is not a vow of poverty, and it’s not a “have it all” luxuriant living. Basically, a lifestyle cap answers the question: “How do I believe God is leading me to live and how much does that cost?” It includes things like family, location, size of house, work, possessions and experiences, ministry, etc.
A lifestyle cap can help protect against lifestyle creep by setting a living standard in advance so that lifestyle doesn’t automatically adjust with each increase in income. And it can help in setting spending priorities.
To set a lifestyle cap, start by determining your core priorities and non-negotiables. Prayerfully consider questions like:
- How/where do we believe God is leading us to live?
- What aspects of lifestyle do we need in order to feel fulfilled?
- What do we envision our family to look like?
Then determine, as closely as you can, what that lifestyle would cost and what income and savings you need in order to get there. This process will help you set priorities for using raises and windfall income.
Putting it All Together
Effectively handling increases in income is a matter of planning and preparation. Without pre-planning, we tend to use additional income – especially windfall income – in impulsive ways that don’t move us toward financial freedom. Here’s a summary of some helpful tools to help you plan for additional income – whether in the form of raises or windfalls:
- A current, working Spending Plan
- Current, thorough Spending Records
- A list of financial priorities
- A vision for a lifestyle cap
With these tools in hand, you’re prepared to plan for income increases. See our Related Articles below for additional help. But even if you don’t have all these ready, you can still maximize additional income by planning how you’ll use it in advance. Don’t let the opportunity to make progress toward financial freedom pass by – prayerfully consider how you can use the increase God provides to take next steps in your stewardship.
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