If you come into a financial windfall, instead of splurging on a luxury item, treat this additional cash as a normal paycheck. Pay your regular bills as you normally would with this extra money, so that when your paycheck or other form of income comes, you can save it to pay for your bills for the following month. It may even be helpful to pay those following months’ bills early, so long as there is no penalty to do so.
Let me give you a personal example of what I mean. When I received a hiring bonus from an employer on November 1, I used that money to pay my big bills (mortgage and car note) as if that money was my very first paycheck. Then once I was paid on November 15, I used those funds to pay the December big bills. I have been practicing this for about 10 years now, and I wish I had done it sooner, and here’s why I want you to do it too.
1) You save money. Interest accumulates on many big purchases such as homes and cars. Anytime you can make your scheduled payment early, do so! You will pay down your principal sooner, which means you have a smaller balance on which interest accumulates. Make sure that your lending institution has no prepayment penalties—most do not, but you have to be sure that it is not costing you money to pay early. In addition, you must indicate that you are paying the next scheduled bill and not solely making a principal payment. If you do not make that distinction, your money will not count as a scheduled payment and you will have to make another one to stay current!
2) You build yourself a little safety net. As you know by now, I’m a huge fan of Dave Ramsey’s baby steps, where Step 3 is to create a savings of 3-6 months of living expenses, after you’ve paid down your non-mortgage debt. If you have not gotten to that step yet, by using your windfall money to get ahead of your bills, you are buying yourself a little bit of time and protection. If for any reason you lose your income, but you have prepaid your next month’s bills, you have essentially purchased yourself around 30 to 60 days to replace that income before your next month’s bills are due. This time will alleviate some of the pressure created when dealing with the loss of income and the immediate demand to replace it.
3) You relieve some real pressure. Something inside of us gets freed when we are living in anticipation of money to take care of things to come, as opposed to working for things that are happening or have already happened. We feel more in control of our financial situation, and due dates do not catch us off guard. In fact, if we practice this well, we may be even able to set-up automatic payments so that we are not aware of when bills are due. Of course we’re watching our bank accounts and planning our money and still being responsible stewards of the resources God has set before us, but the pressure to make money to pay bills is somewhat alleviated when we put some space in between when the cash comes in and when the bills are due.
You do not have to get a hiring bonus in order to get ahead of your bills as I did. You can use money from an inheritance, tax returns or other governmental payouts, legal settlements, grand prize winnings, any money that you have not previously earmarked for regular expenses.
The key point here is that you have to pay for things with the windfall as soon as you get it to set yourself up for success. Otherwise, you may be tempted to spend the money on luxuries or wants. Or you have to trust yourself to set aside money in another account to pay for them as they come due. If you are not yet disciplined enough to save money and try this plan, I urge you to continue to find your confidence in this statement: if I really want to get my finances in order, I must make lifestyle changes in order to do so.
So what do you think of this plan? Share your thoughts below!