Or $5,000, or $20,000, or $50,000?
I recently was faced with this question. Last year, I had withheld a boatload of federal tax since we were having a great year, but when I took our paperwork to my CPA, he did his magic and minimized our tax liability, so we got a 5-figure refund.
As I left my accountant’s office, ideas started swirling of how we could spend the money: I could buy a newer car, we could renovate our kitchen counter-tops and bathroom vanities, we could take a trip, or we could buy a fancy home entertainment system.
Almost as quickly as those thoughts came to my mind (I say almost because I’m not perfect), they were driven out of my mind by my overarching personal financial goals and vision. I knew where the money was going; I had just forgotten for a moment.
High earners are often in a similar situation where they get a lump sum of money, whether it be a bonus check, a royalty check, a profit-sharing check, or some other way. Often in this scenario, the big check comes, they look around as if they just won a small jackpot at the casino, and the question is then asked, “What should I do with all this money?”
The problem with this scenario is that if you wait until you have money to make a plan for your money, you are already set up to lose. You will never become rich until you make a plan for your money.
Having an idea or plan for where this money should go, before you have it, can help you avoid some common pitfalls and snares that are set by and for our consumer-driven society. Every year many people experience this situation when a large chunk of money shows up in the form of a tax refund. Marketing companies and retailers know this, and are hyper-vigilant to get people to spend it on stuff they don’t even need or want, even before they actually have it. Some companies offer, or used to offer, a high-interest loan against the tax refund for those individuals who couldn’t control their urge to spend the money for a couple weeks.
There has to be a better way, especially if you experience lump payments on a more frequent basis.
Now, my financial situation is not yet perfect (again, I am in the ‘high earner, NOT rich yet’ consumer category), but three steps I have taken have helped me avoid some pitfalls I see in my way of ‘becoming rich.
- Make a personal financial dream/vision board. Don’t rely on someone else’s vision or dream or goals. Make it personal so you can stick to it. No one else is making it for you; it is self-prescribed. It can be big and lofty, or simple and minimalist. The point is, it’s YOUR dream, YOUR vision.
- Make a plan to accomplish your dream. Start with the end vision in mind, and work your way backwards from there. How much debt do you need to pay off? What are your interest rates, and terms on your debts? Where will you invest? And most important in this plan, address what aspect of your financial plan keeps you up at night the most. Be sure to include all aspects of saving, investing, and paying off debts in your plan that will help you accomplish your goal.
- Finally, execute the plan that YOU made to accomplish YOUR goals and dreams. You are not accountable to anyone else for making YOUR dream happen. At the end of the day, you are the most accountable to yourself. You had the dream, you made the plan, now make it happen.
I personally have a dream and vision of early retirement, and the freedom that will allow me. So I wrote up a plan, including paying off my student loans and investing in mutual funds and retirement accounts (and eventually real estate). In my dream, I envision taking a family trip yearly, to create lasting memories for my young children. So I plan for that, and save for that. Nothing in my personal dream has anything to do with consumer goods or products, because I have found that they do not bring me as much happiness as experiences. (Of course, everyone may have different dreams which may include a product or object. Mine just doesn’t).
Over the past year and a half, I have been executing my plan, and I am loving the results. I am watching our retirement accounts grow, our investments rise, and my student loans drop. I can see some light at the end of the tunnel, and it is very satisfying to work towards a goal that I set.
What would I buy with $10,000? I’ll check my plan, but I’m sure it’ll say that I should buy my freedom.