It's all your money
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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