It's all your money

by Philip Brewer on 26 September 2007 11 comments
Photo: Philip Brewer

Sometimes you get a windfall--a bonus, an award or reward, a gift, a long-forgotten loan unexpectedly repaid. When that happens to you, do you use the money to make a special purchase? Let me suggest an alternate way of thinking about it: It's all your money.

Spend according to your budget

Whenever I tell people about some money that I've received through any means other than a regular job, they always ask, "So, how are you going to spend it?" To me, the question is just weird. My spending is determined by my budget. It has almost nothing to do with how I got the money.

I say "almost" because although my income doesn't directly affect my spending, it does affect my budget. If my income goes up (and I think it'll stay up), I might well decide to raise my standard of living a bit. And if I got a windfall so large that it entirely changed my financial situation--a winning lottery ticket, let's say, or a major inheritance--then I'm sure I'd adjust my budget based on what my improved circumstances would allow.

In general, though, money that I get one way is just like money I get any other way.

There is one case where I make an explicit exception: monetary gifts from friends and family. When someone gives me cash or a check, I always spend the money on something in particular and tell them what it was in a thank-you note. I think it's simply polite to let someone know how their gift made your life better. (Also, doing this well--buying yourself something that shows that you understand and respect the values of the person who gave you the money--makes it quite a bit more likely that you'll receive additional monetary gifts in the future.) Even in this situation, though, I tend to buy things that were already in my budget; I just accelerate the purchase a bit.

Your cash is your money too

Related to this is spending money differently if you've got cash in your pocket. There are a lot of people who say they spend differently if they're spending cash than if they're using a credit or debit card. Oddly, some say they spend more if they're spending cash while others say they spend less.

Some people say that they'll just spend whatever cash they have, making purchases that they'd never make if they had to pull out a credit or debit card. Other people say that seeing the amount of cash in their wallet dwindle gives them a very clear sense of how much money they're spending, whereas whatever they put on their credit or debit card is somehow invisible until they actually get the bill (at which point they're shocked at what they'd spent).

I say: It's all your money.

Not a matter of discipline

The insight that "it's all your money" is key to making your budget work for you.

Note that this has nothing to do with being disciplined about following your budget. Your budget is yours and you're free to deviate from it anytime you want--but when you do, whatever it is that you're getting comes at the cost of other items in your budget. If that's what you want to do, then maybe your budget was wrong in the first place. Or maybe your budget was right and you'll regret the purchase in the morning. Only you know that, and maybe it'll be some time before you know for sure.

However, when you treat some of your money as different from the rest, you fool yourself into thinking that there's no trade-off--that you can get some unbudgeted item without affecting your budget. All you really get, though, is a budget that's less useful.

An example by analogy

So many people seem to think that the question "So, how are you going to spend that money?" is a reasonable question--and it seems so weird to me--that I've been driven to coming up with an analogy that might help people understand how I see things:

You're at a restaurant. The waiter is coming by regularly and refilling your water glass, but you're thirsty and the waiter isn't quite keeping up. Then the restaurant manager comes over and tops off your glass--you've just had a water windfall. Now a guy at the next table nods at your glass and says, "So, how are you going to drink that extra water?"

If you'd have trouble answering that question, then maybe you understand how I feel when people ask how I'm going to spend my windfall--I'm going to spend it just like I spend my other money, because it's all my money.

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Guest's picture
Guest

I believe that being disciplined is the most important thing in regards to money. It seems the more we have the more we want to spend. It is important to enjoy life and money is part of that but it is also important to live a balanced life.

Guest's picture
Jamie

...this post just seems off to me. My wife and I have a practice of buying ourselves one nice thing we wouldn't ordinarily buy each time we get a raise or unexpected bonus (new shoes, a couple new shirts for work, etc.). Was it in our budget? No, but the income wasn't either. Yeah, it's "all our money" and if we don't spend every cent of it, we're still better off than we were the day before.

Sometimes Wise Bread comes off preachy and smug - tonight is one of those times.

Philip Brewer's picture

A lot more people think like you than think like me. I'm quite the odd man out on this point.

I'll also admit that a tendency to smugness is one of my less appealing traits. I don't think I'm smug here, though. (I'm smug about bicycling for transportation.) I sincerely think that treating all your money the same is fundamental to making wise decisions.

Let me ask this: why are the nice things that you buy with windfall money not already in your budget? To my way of thinking, ordinary nice stuff--stuff that you hope to buy one of these days, if all goes according to plan--belong in your budget.

Guest's picture
Jamie

....sort of. My wife and I pay ourselves a cash allowance each week. This can go towards anything we like - eating out, wine, new shoes, clothes, accessories for my scooter (that's where I get smug - 70mpg!), going to movies, etc. But when these windfalls come in, we "reward" ourselves with one purchase outside our allowance. When we receive our GST rebates (we're Canadian), we typically buy a bottle of wine for $20, and the other $60 stays where it belongs - in the bank account.

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KCLau

I got a friend who is so frugal that he didn't make any budgeting because it is not necessary. There is one time he asked the tire shop owner,"I have no budget for these, do you have any way to offer me the cheapest one?". The businessman replied,"Yes, there are some used tires but still very nice. It is 50% off."

Philip Brewer's picture

Okay, that's actually very close to the way my wife and I manage our finances. I just think of it a little differently. (In your example, I'd think of it as budgeting for an extra bottle of nice wine everytime the GST rebate comes in.)

So the question then is: Is there any advantage in thinking of it that way, versus thinking of it as an outside-the-budget splurge that you get for free because it's bought with found money?

As I tried to explain in the article, I think there is an advantage, as long as you think of your budget as a tool for maximizing your satisfaction within real-world constraints (not as being a constraint in its own right). But you may be right that I did so in a preachy way that came across as a criticism of doing things any other way. In fact, I'm a big proponent of any of the numerous little tricks that people use to help them be frugal.

Sorry! And, thanks for helping me clarify my thinking here.

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Jamie

Seems we're on the same page! I think that a well planned budget allows for more freedom, rather than less. Once we got serious about our finances (2-3 years ago, early-20s) we found that we stopped worrying about money. Want that new t-shirt/CD/pair of shoes/etc.? Go for it. The budget is there, and as long as we respect it, it will look after us. I know people our age that make a lot more than we do, but we've got a nice house, a decent car (we're carpooling now that it's getting too cold to scooter), and good retirement savings for our age. We don't really need or want everything, as we've made room in the budget for frivolous, guilt-free spending.

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Debbie M

I think if you get surprise money that's not in your budget, then you can spend it on things that aren't in your budget. My first response was to interpret your point as being that you don't have to throw all your extra money in the splurge/fun category. I think when people ask you what you're spending it on, there may be an underlying assumption that you're going to splurge, and they want to know how you like to do that.

Of course, you might prefer to put the money in the debt payoff category, retirement category, next new car category, charity category, etc. If you have a budget, then at least one of your categories will get the extra money, right?

Maybe your point is that you put some of the money in each category, in the same proportions as you add your other money? And then you will be able to reach all your goals a bit sooner? As opposed to creating a new goal that you can meet right now?

Note: my extra surprise money used to all go toward (early) retirement savings (except for gifts, which I treat like you do). But for now it's going toward my remodeling savings. These are categories I want to put a much bigger pile of money into, but not at the expense of my other categories. And so that's where my surprise money goes. I suspect others feel the same way about splurge money: they would rather spend a lot more money splurging than they do, but not at the expense of eating, living indoors, etc.

And it sounds like some people find that cash feels like "extra" money and other people find that credit cards feel like extra money, but they know it's not really, so they try not to tempt themselves.

Philip Brewer's picture

I categorize the money that I spend. I don't categorize my assets. At least, not the way you describe--I don't divide them into "retirement savings," "house downpayment," "new car," etc. My monetary assets are all just one big lump. (Even money in an IRA isn't necessarily allocated to retirement--it's just in that kind of account for the tax advantage.)

When I get money (from whatever source), it joins my big lump of money. It doesn't get allocated to anything in particular until it's time to spend it.

From time to time I reevaluate my budget. Does my income, together with my lump of money, support my long-term plans? Does my budget cover my needs and wants? Does my actual spending match my budget? Based on the answers to those questions I change my budget, but I simply don't allocate income to budget categories--income goes into the lump of money.

The fact remains, though, that my friends and family are unhappy when I can't answer the question "How are you going to spend that money?" Having spent way too much time thinking about yesterday and today, I think the answer they're looking for is the answer to the question, "What's the most interesting purchase coming up that you've budgeted for but haven't bought yet?" That might do the trick.

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Debbie M

It sounds like your real answer is to put it into savings. So you could say that you plan to glom it on to your big lump of money. But it sounds like your new idea for an answer is much more fun and can lead to a more interesting conversation.

This now sounds like the problem I have with birthday money. Which thing that I want so much that I was going to buy anyway will I now honor my giver by getting right away? When I was poorer, I could usually think of something special sounding that I was putting off. Now it's not so easy. I've learned to put things on an Amazon wish list and then refrain from buying anything from it before holidays. Then people can either directly or indirectly get me things from there.

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Slinky

Found this article from a recent comment link. I have to say, I'm totally with you on this one. I don't get it when people blow their tax refunds on luxuries because it's "free money". 'Extra money' just means you have more room in your budget. That means you can afford a little extra something, and I sometimes do, but most of the time, that money gets used for something important that I'm working towards.