If you’ve seen a recent increase in your income (or you know one is on the horizon) …congratulations!
Now, let’s see if we can really get that money working for you.
I know it can be tempting to look at the extra funds as something you can run out and spend every month. However, if you make a few small changes when you immediately see that increase, it could make a difference in your long-term financial situation.
The 1/3 Rule
The 1/3 Rule allows you to break up your “new money” into increments that allow you some freedom and some security.
Lifestyle
Let’s start with the fun one, shall we? Take 1/3 of that increase and put it toward something fun or allow that money to hit your checking account. You’ve worked hard. You should be rewarded!
Savings
A little less fun, but still something that can become a huge benefit. Need to replenish your emergency fund? Start a college savings plan? Increase your retirement contributions? Take 1/3 of your income increase and create an automatic withdrawal into your selected account.
Taxes
Decidedly the least fun, but still necessary. Have your employer take out 1/3 from your paycheck or increase the amount you’re paying in estimated taxes by that amount. Yes, I know you don’t want to – but you’ll thank me come tax time.
A Few Things to Keep in Mind
Remember that the 1/3 Rule is best implemented immediately; once you start getting used to that increase in pay, it will be harder to make these changes. If you do it now, you’ll immediately get used to it.
Also remember that this is only “back of the napkin math”; be sure to consult your tax professional when it comes to making changes to withholdings or your estimated taxes.
Cecilia Beach Brown Is a registered representative offering investment and advisory services through Lincoln Financial Securities Corporation, Member SIPC. Advisory Services are offered to residents of Maryland. LFS and its representatives do not offer tax or legal advice. Please see your tax or legal professional regarding individual circumstances. C Beach Brown, LLC, Pilot Financial Advisors and Lincoln Financial Securities are separate entities. LFS-4264769-020222