When I started my professional and family life, at 21 years old, I had a very limited income. It was barely enough for my expenses for the month. This forced me to plan in detail the year’s irregular expenses and try to “match” them as much as possible with my irregular income, such as the bonus (among others).
That means that when it arrived, that bonus was already practically spent. I had already contemplated it, months before receiving it. In that sense, it was not additional income and I could not use it to buy gifts, treat myself, or simply to invest and build a better future for my family.
This changed little by little, because my income was growing and this allowed me greater ease and flexibility. But it wasn’t immediately: habit made me repeat what had worked for me before. I didn’t know a better way, until I started learning the spending plan methodology, which, as I’ve said, completely transformed my financial life.
I stopped “forcing” myself into a budget and started managing my spending with intention, starting with the things that were most important to me.
As I have explained several times in this space, one of the rules of the spending plan is precisely to contemplate expenses that do not occur every month (irregular). Thus, with my income, I began to allocate a small amount, month by month, so that when they occurred, I could face them without problems.
My future income (bonus, savings fund, vacation bonus and potential bonuses) stopped being part of my “planning” and became true additional income, which was not committed and which, therefore, I could freely allocate, at the time of receiving it, towards what is most important to me.
That makes a huge difference. But you have to live it to really understand it.
Unfortunately, many people spend their bonus months before receiving it. I have witnessed people who go on vacation in the summer, take out a loan and plan to pay it off once they receive that income in the month of December. Many others finish it during the “Buen Fin” that usually extends until “Black Friday” (they even spend much more than what they will receive, but of course, for months without interest).
Any income that is spent (or contemplated to pay for something) before one receives it, reduces flexibility and keeps our financial situation tight.
On the other hand, when the bonus comes as truly additional income, upon receiving it one has complete freedom to decide how they want to use it. A whole range of options and opportunities opens up to us.
In my particular case, over the years I have used the bonus for many things. When I had a mortgage, a good part of it was used to make a principal payment and save a lot of interest (in addition to reducing the remaining term). On other occasions, I have allocated it to savings for retirement. But I have also used it to get closer to a goal faster (for example, a trip) and even for what it is: facing certain expenses typical of the time.
All this with my wife, following the methodology of the spending plan which consists, in principle, of answering a simple question every time one receives an income: What do I need and want this money to do for me, before they pay me again?
There are people who have told me that “spending” (or planning how to spend) the bonus for many months before receiving it is not necessarily bad and can also be considered that one is spending it intentionally. It’s true, but what would happen if for some reason you don’t receive it? It is a scenario that one rarely imagines, but that can happen.
If for some reason you lose your job, it is likely that your settlement will include a proportional part of the bonus according to the days worked, in addition to the legal compensation. But when you have to use part of this money to cover previous commitments (pay what you spent before), your available money could be considerably reduced. In times where you are under pressure to get high again, that lack of flexibility is neither desirable nor convenient.
It took me many years to understand the importance of this simple rule of a spending plan: do not spend money that you have not received. Do not compromise future income. Only allocate the money that one has already received, that one has in hand.
This does not mean that one cannot plan ahead. Of course it is possible. But many times life throws us curveballs and we are forced to change the plan. If you’ve already spent it, you don’t have it available to reallocate and adapt.
