Budget when income increases?

[mouseketeer_mom]

How do you adjust your budget when your income takes a big jump?

A little background. We live on very tight/strict budget. Own our home with a 7 yrs left on a 15 yr fixed mtg. We have two cars but just owe on one. We have less than 1K in debt (credit card but trust me, 1K is all the debt we can afford) We have 3 kids, 9 yrs, 7yrs and 7yrs. DH and I both work. We are able to save about 1K every 6 mos on our current budget. (before anyone asks, I got a second job to be able to afford our 2nd vacation in 3 yrs, to be paid, in full, in cash. just wanted to clear that up before anyone slams me because of the ticker in my signature) We suffered a huge financial setback in 2007 that went through our savings and tightened our budget to where we are today. By the way, that 2K we manage to save each year seems to find a home before it really can amount to anything I would consider a "safety net" like we had before. So, after living for a couple of years on such a strict budget, I got a second job to be able to afford the "extras" like camps for the kids, our own camper, and a Disney vacation. It's going great! But now we are getting a huge boost. Believe it or not, even in this economy, DH has been promoted! It's huge, a 40% increase in his income! I almost feel like we won the lottery but also like I must be dreaming and when I wake up, we'll be right back where we were last week.

So, here's the question, how do adjust your budget without loosing control. Sometimes I feel like it's putting a banquet in front of starving people but I don't want to throw our budget out the window. DH has been very open about the fact that he is taking this promotion to improve our quality of life. We will obviously increase our 401K savings (as the contributions are based on percentages and we contribute the max). But, beyond that, I'm not exactly sure how to go about reworking our budget. Our kids are growing, so our grocery budget could use some growth.

For the first time since we started having children, we find ourselves looking to expand our budget instead of tightening it...... I have no fippin' clue how.

What about percentages? Take the present percent of our income that is spent on "adjustable" things like groceries, clothes, entertainment etc... and having the same percent of our increased income go to those things. The percent of our income that goes to fixed items like mtg, insurance, utilities etc will go down and our savings would increase.... does that sound reasonable? I'm gonna need a calculator...

Other ideas or suggestions?

 

[PrincessSuzanne]

Enjoy it, but cautiously. I would not increase the budget too much, but that is just me, I would pay off my debt and start putting a huge chunk of it in savings to build that cushion. You never know what is going to happen and you should always be prepared.

Suzanne

 

[clh2]

Congrats on the promotion! How exciting!

Just a thought - trying to be realistic - if your DH just received a promotion, will he be working more hours, maybe weekends? Travelling to other parts of the country?

Will you REALLY be able to work your 2nd job if he is going to be working harder/longer hours?

 

[TifffanyD]

Hi! I have my direct deposits divided on a percentage basis: 10% to "fun" savings, 35% to "responsible" savings, and 55% to living expenses (ie checking account). When pay gets a boost, so do those accounts! This way I will still be putting more in savings but we will also get more to play with.

 

[wdwmom0f3]

Enjoy it, but cautiously. I would not increase the budget too much, but that is just me, I would pay off my debt and start putting a huge chunk of it in savings to build that cushion. You never know what is going to happen and you should always be prepared.

Suzanne

I agree! Like you said the 2K always ends up finding a home so this would be a great time to really start saving and build it up to 3 to 6 months of living expenses. After that, splurge on something fun!!

My DH was also just promoted and it's a great feeling. However, we have one child that will be starting collage soon so there ya go. It's always something!

 

[crisi]

Save it. Get the car paid off, pay off the credit card bill. Pay down the mortgage as much as you can. Put the money away. Max 401k savings. You might be able to get rid of the second job. You only have a few years until your oldest starts college - and if that raise is large enough, it just tanked your chances of much in the way of "free aid." Remember you'll be paying more in taxes now as well.

Once you get the car paid off and the cushion built back up, money saved for a different car when your oldest car needs to be replaced and figure out what the tax burden is going to be like - you'll have time to spend the rest.

 

[ceecee]

Years ago, DH got a huge promotion. We lived the same way we were used to living and saved a ton of $, paid off all the bills and then the mortgage. My advice would be to pay off the CC debt, car, save for emergency savings, pay add't mortgage, THEN adjust your budget, but still try to save maybe 20% of the 40% increase. We know someone who got a $19000 a year raise and they have the same bills and no savings as before.

 

[NYCDiane]

I would be very careful ---- the more you make, the more you spend.

If I was in your position (oh how I WISH! LOL!), I would look at my debt and use the extra to pay off the highest interest first, then the next, then the next. If possible, make an extra mtg payment (Suze Orman and all the financial experts say you should make one extra mtg pmt per year).

Take a little and put it in your kids' bank accounts/college funds. Take another bit and save it.

 

[PinkRhombus]

Here is the thing...Quality of Life does NOT mean spending every new dollar on stuff. Quality of life also means being more secure financially. How much better will your lives be without worrying so much when something breaks?

If you have a budget written...do you also have a plan for the next year...two years...five years? What applicances will you have to replace? Roof okay? How old is the AC/Furnace?

If it was me...and we're pretty tight with our budget/money...add a little to your entertainment budget...maybe grocery & household, too....but by a small amount until you get adjusted to things and have a more detailed spending plan for the couple of years established.

 

[meriface11]

Save it. Get the car paid off, pay off the credit card bill. Pay down the mortgage as much as you can. Put the money away. Max 401k savings. You might be able to get rid of the second job. You only have a few years until your oldest starts college - and if that raise is large enough, it just tanked your chances of much in the way of "free aid." Remember you'll be paying more in taxes now as well.

Once you get the car paid off and the cushion built back up, money saved for a different car when your oldest car needs to be replaced and figure out what the tax burden is going to be like - you'll have time to spend the rest.

i recommend your DH do a w4 worksheet to see how this may all play out from a tax perspective. a 40% increase is likely to have an impact on your tax bracket, and it would be tough to not account for this and then owe a lot of money at the end of the year.

 

[mnrose]

I guess I'm with everyone else. Save it. Starting when I was 28, my DH and I saved every salary increase we ever got. All of it. It went straight into the 401K. We never noticed that we got less money, because we didn't. We did take vacations which were nicer by spending PART of annual bonuses on vacations. Note that I said PART of the bonus money. We saved 1/2 or more of all bonuses. Our goal in life was to be retired (or mostly so) by the time we were 50. Well, we didn't make it...I retired when I was 48. We own two homes, fully paid for, three cars (fully paid for), have no credit card debt, take 2-3 vacations per year, etc. Life is truly good.

This didn't happen by accident or because we "got lucky" and won the lottery. Nope, it's because we never, ever spent all the money we made. We were agressive savers, and we still clip coupons, shop garage sales (not because we "need" to, but because nothing else makes economic sense) and generally live well below our means. We always drive our cars until they fall apart completely, but in the meantime, we take immaculate care of them so they last and last. We have a 22 year old truck, a 10 year old van, and recently bought a new sedan to replace our 18 year old sedan. I think you get the point.

Nothing feels better than not having to work, and being financially comfortable, believe me.



So treat yourself to perhaps a bit nicer vacation every year, but other than that be conservative with your money. Particularly in these times. You never know when one or both of you will lose a job, and you must be prepared. If that never happens, well, then think of all the fun you'll have being able to stop working entirely decades ahead of your spendthrift friends.

 

[Colleen27]

For the most part, we don't. Our day-to-day lifestyle has stayed the same or gotten even more frugal than it was a decade ago when we were living on half the income (partly because I've gotten into green/sustainable living). One of our highest priorities is keeping our obligations low and getting them even lower whenever possible, because that is what has enabled us to have a pretty comfortable lifestyle with a ton of flexibility and family time.

Pay increases and unexpected windfalls go into savings, some for long term goals, some for emergencies, and the rest in a general fund that we use for bigger purchases. We have used that fund for everything from sports fees to Disney trips to buying our new house mortgage-free, but the "rule" is that we discuss the things we want to use that money for and make conscious decisions, rather than allowing our increased income to lead us back into spending carelessly on things that won't provide any real enjoyment or benefit. We don't have a ton of self-discipline that way, so if we were to play with percentages or consider pay increases as a reason to change the basic budget, we almost certainly would fall into some of the bad spending habits we had when we were a dual income family, like too many meals out when we don't feel like cooking or buying things on impulse that we really won't get much use out of.

 

[tlh0726]

If it were me, I would continue on the same budget and put the extra money into savings as if the raise never happened. Once I had 6 months of budget money saved I would then start putting the extra money towards paying down debt starting with the highest interest rate first.

If something pops up you know that the extra money is there to "help" out, that you can loosen the purse strings a little when needed. To give yourselves a treat from time to time.

I watched both my family members and friends do the same thing. Refinanced houses to lower payments so that they could keep afloat. But instead of saving the extra dollars they just ran up more debt and are in deeper trouble now than they were before. Because they had the extra money available they just bought this and financed that.

You made it 2 years on a tightened budget. You can do it longer. Keep focused on the goal. Wouldn't it be wonderful not to have that car payment, mortgage payment, etc. You could easily turn that 7 yrs remaining on your mortgage into a 5yr or less by paying extra each month once you have your saving built back up.

 

[princessbride6205]

We were in a similar situation last December. DH used to make an okay salary, then make a ton in overtime when things got busy. His co. decided they would rather know exactly what he'd make than guess about OT, so they added together the salary and OT he made last year, and that's his new salary this year - but he doesn't get paid for OT anymore (he's a manager so they can do this legally). So we didn't get an actual raise, but now his extra money is spread out in each paycheck, as opposed to just during 4 mos out of the year. Last year I budgeted like we only had his regular salary and with that we were just getting by. It was really stressful. Of course, he would work lots of OT and then we'd feel like we could put money in savings, plan a vacation, buy new clothes, etc. Now, I know each month we are making "more" and it's been so much better to budget and save.

I guess my point is, if your old budget was stifling in how tight it was, then expand it in certain areas. Like you said, maybe more towards grocery. With 3 kids I think you'd want to put a bunch away towards their college education. I don't do percentages like some others recommend. I have figured out all our expenses - subtract that from our after-tax income, and voila that's the amount of money we can save or spend. In our case, I was really motivated by how quickly our savings could add up, so I've been tracking all of our expenses and seeing where we could save. We love dining out a few times a month and Disney vacations, so we have money set aside for that, and the rest is for "rainy day" savings.

Congrats to your family - hope you can find the right budget for your new income!

 

[disykat]

Like everyone else, I would try not to increase my budget, pay off any debt, and build a cushion. Hopefully you will be able to do that quickly and then you will be able to loosen things up a bit. It is my experience that kids get way more expensive as they get older. Musical instruments and lessons, braces, etc.

 

[dyna]

30 yrs ago DH took another job within his company he worked for our income more than tripled in less than a year had DH saved 1/4 of his higher income we'd be retired an living comfortably right now which was what I'd tried to talk him into doing. He acted like I had no clue what I was talking about he's now 62 yrs old an still working 60 to 70 hours a week we doing better than we was but still nothing saved for retirement what little was saved went towards medical bills when our DD was sick for 2 yrs

 

[pilgrimage]

What a wonderful blessing! I'd say pay off the credit card, pay off the
car, add to the mortgage principal each month and contribute 1% or more to a charity or church helping those who are
still hurting in this economy. Hooray for your family.

 

[mouseketeer_mom]

What a wonderful blessing! I'd say pay off the credit card, pay off the
car, add to the mortgage principal each month and contribute 1% or more to a charity or church helping those who are
still hurting in this economy. Hooray for your family.

Thanks for this, I'm ashamed to say that in the "we've survived it" mentality, I needed this little reminder.

For those of you that mentioned taxes, you are 100% correct. We've always used our tax return as sort of a forced savings by having the maximum deducted from each pay check. I have an irrational fear of ever, ever owing taxes So, an additional withholding may be needed.

I like the idea of doing things by percentages. I will definately try to get rid of the truck payment ASAP. I can pay off the credit card, but that worries me a little. It's the only one we have for emergencies and I've been reading on here about people having their accounts closed or having their limits reduced even further.

We need to create a new budget envelope now that we can afford it... The Orthodontist

My second job will be staying, I love it. I can set my own hours, I enjoy it and the money is very good. DH won't have to travel, thank goodness but his hours will increase. Unfortunately for him, he'll go to work earlier but he will be getting home at the same time. We also are truly blessed to have a large, supportive family that helps out with the kids.

Anywho, I think DH and have decided to try it for a few months (3) and make sure we feel like we are going in the direction we should be and then we are going to check in with our financial advisor. She knows about situation and some of the unique retirement issues that we have to consider when planning, so we'll have her take a look and offer advice.

Thanks so much for all the well wishing and congrats. We know we are truly blessed in todays economy. Frankly, given what we've seen some family and friends go through in the last year, we're thankful to be employed and keeping our house. This is just the icing on the cake. And, as we've learned in the past, anything can happen and life can change quickly.

 

[KAMKIM]

First of all congrats and that is great news...dont get too much of that around here

Second, I would wait and see what his take home pay is, increase the food budget by maybe 20 a week? Put each of the kids in an activity, maybe give yourself a small allowance for you and your husband and save the rest

for everyone saying they would not increase their budget, if your budget was so tight to begin with you probably would want a better quality of life too if the opp presented itself.

 

[LKHomemail]

I would not make any increases into the family budget. Save ALL the money and continue living as you are now. The job is by no means secure. Getting a job is only half the battle. Keeping it is something else . This is a bad economy. 10 percent are unemployed. That number only reflects those currently being counted (receiving unemployment insurance benefits). There are at least 10 percent or more that have exhausted those and are still unemployed but not included in the count. My point to all this is it is going to get worse. The workplace is getting to be quite hostile and doggie dog. Employers are getting nastier and more difficult to work with as they know they have an advantage over employees. I would encourage you to save the money and have your husband really watch his back. You will not be sorry you saved the money.