We recently received some good news from my husband’s employer. Starting this month, he’ll be getting a raise of a few hundred dollars per month. Of course, whenever we experience a change in income or expenses, we sit down and create plan for the change. We have clear financial goals that we both want to reach, but we don’t always have the same ideas on how best to accomplish them.
I’d be willing to bet that many other couples out there are dealing with similar issues. Thus, I wanted to share some tips that we’ve found useful in hopes that they’ll help your family thrive.
Examine your short-term and long-term goals
Earlier in the year, my husband and I discussed some goals that we had in mind for 2011. Here they are:
- Build our car replacement fund. Our goal is to save another $5, 000 in a dedicated savings account.
- Bump up our emergency savings to a full six months. With a baby on the way, we decided we would feel more comfortable with getting more money into our savings account.
- Pay down our student loan debt. This is our last non-mortgage debt, and it’s decent amount of money. What I dislike the most about this debt is how slowly it’s going down. For every $150 or so we pay each month, the principal only declines by $45-$60.
We also have some smaller financial goals, but these are the big ones.
Allocate new money to what’s most important
If you’re lucky enough to get a raise, or otherwise come into money, it can be hard to decide which of your goals is most important. This is especially true if your partner has other ideas.
This is exactly the situation we faced, as we both had our own ideas as to we could best allocate my husband’s raise. I’d love to pay down that student loan, whereas my husband was more concerned about getting our savings built up before the baby arrives in July.
So how do you decide what to do when you don’t see eye to eye? For us, we’ve found the following tips helpful:
- Sit down and talk. Listen to each other’s motives on what to do with the money. It’s extremely easy to find fault with a goal, but hearing and understanding why your partner wants to do something can be very productive.
- Run the numbers. When we’ve discussed financial issues in the past, we’ve often found ourselves getting into the emotional and psychological side of things. When this happens, it helps to put some objective numbers down on paper (or in a spreadsheet) to keep your thoughts on course.
- Be willing to compromise. If we can’t agree to do one thing or another, then we try to find some sort of mix that addresses both of our concerns.
In this specific case, I realized that wanting to pay down the student loans faster was more of an emotional decision than a financially sound one. If we’re able to go ahead and reach our savings goals earlier, it’ll give us a cushion and allow us to start aggressively tackling our other goals.
We’re expecting a tax refund, and a good portion of that will go towards paying down the student loan. In the end, we’re hoping to meet all of our goals by the end of the year (if not sooner).
Consider having some fun money
I know many people who are so intense about their finances that they simply won’t deviate from their plan. While that works for some people, my husband and I just aren’t like that. While he’s definitely more disciplined than I am, even he wants to have some fun money.
Given the above, it wasn’t hard for me to understand his desire to also increase his “splurge account” account a bit. With everything that he’s put into building our family’s finances, I completely understand where he’s coming from. So while the majority of his raise will go towards fulfilling our joint financial goals, he’s setting aside a bit to have some fun.
I think it’s healthy for couples to allow themselves to enjoy their hard work. When I have a good month, I review it with him and put a little on the side for myself. It’s about being honest and open with each other, so one doesn’t feel like they have to hide a little stash from the other spouse.
Your thoughts on handling raises
Every family handles their finances differently, so I’d love to hear your take on this topic. How have you dealt with increases in your family’s income in the past? Did you modify your budget and direct the additional money toward your goals? If so, what specific things did you target? Your emergency fund? Retirement savings? College savings? Or did you do something fun, like start a vacation fund?
9 Responses to “Adjusting to an Increase in Income”
Thanks; the interest rate for the student loan is around 5% believe it or not, but I’m frustrated with how little is going to principal. Once we meet our saving goals for the year, the student loan will be our big focus.
The last time either of us received a raise, we were paying off debt, so that’s where it went.
Neither of us has gotten a raise in the last three years (I took a pay cut â€” without changing jobs â€” three years ago and have been frozen there since; he’s just been frozen), and we’re both hoping not to take cuts for next year. (The education situation in AZ is pretty ugly.)
I would love to need a plan for what to do with more money!
One thing my fiance and I have done to adjust to the increase in income, is to plan how to spend the income before we get it. We got through our budget and find what parts we want to increase and of those which are most important. When my fiance got a raise last year we knew exactly where to put the money.
I’m in a very similar position and we recently went through this same process. One of the things that I do, in addition to talking to my husband, is to chat with a friend of mine who has a similar frugal mentality. Sometimes reviewing our plan with someone who isn’t involved helps us get new ideas and perspectives. We opted to start up a new car fund by adding a car payments worth of money to our monthly budget. This way we are preparing for a new car (when my trusty Honda goes) as well as building in a car payment if the need for a new one comes up before we have saved enough to buy it.
Anything else we save goes towards my student loan. In 2010 we hit the limit for being able to get a tax credit for student loan interest. I didn’t realize it phased out, but now that we no longer get a tax benefit, there is even less incentive to keep it around despite being at 3.25%.
@ First Gen American – My first thought was “Wow..thatâ€™s a lot of interest for student loans” too. Although I’m still paying mine off while saving for a house. It’s a low balance at 1.75%, and we have enough in our house savings to pay the entire balance off if we really wanted to. But the mutual fund for our house savings is currently returning about 6.8% so it doesn’t make sense to do so.
Laura, congrats on hubby’s raise and good luck this summer!
I wait for the first paycheck to hit with the raise in it to make sure I understand how much take home pay we’re really talking about (after retirement, taxes etc). It’s always less than what I calculate in my head.
Wow..that’s a lot of interest for student loans. I would definitely try to knock those down. I’m so glad that’s the first thing I did when I got out of college (before saving for a house). I don’t know, it just seemed to make sense to pay down my existing debt before taking on more mortgage debt.
We also have no debts whatsoever, just regular living expenses that we charge on credit card and pay in full. We use CCs for the cashback rebates, which amounts to thousands of dollars.
Any raises, bonuses, refunds go directly into a Rewards Checking Account that pays 4.01% interest and into brokerage accounts at Vanguard and Schwab. We don’t need or want much, and we earn enough that we don’t need the extra cash. Instead of spending it on junk, we just grow our investments.
I lost my comment because of this new “I’m Human” requirement. I guess I entered an O instead of a zero. It looked like a letter to me. But my comment was wiped away, and now I have to type it all over again. grrr.
I recevied a raise and a bonus this year. My husband and I have no debt (no mortgage, no car payments, no student loans, nada) and have over a year’s worth of living expenses in savings at 3.3%. We decided we wanted an emergency kit. Food storage, a generator, and another gun. I’ve wanted to tackle food storage for a while now. Our house receives well water, but without power, we can’t get water. A small generator would power the well if we lost power. And another gun, while not absolutely necessary, is something we also want. We live somewhat remotely, and if anyone were to try to harm us, they’d be done and gone by the time the cops arrived. Protecting ourselves is very important. The rest of the money will go into savings.
Great freakin’ article! I love it! My wife and I are doing the same thing. Being in the military, I am fortunate to get a raise every year. Most might not even notice this increase, but we are using it to pack a huge punch in our debt. By taking on the extra $224 per month onto our student loans and making some other small adjustments, we plan on paying off $40,000+ of debt in 23 months. Keep up the awesome posts on really good stuff like this.