Budgeting isn’t too difficult in theory. You set up your budget around your paycheck, live below your means, and hopefully put away a percentage of what you make each month into savings.
But what about those annual sources of cash windfall you’ve come to expect that aren’t part of your income? You know the ones: a tax refund from Uncle Sam, year-end bonuses from your company, and some birthday or Christmas cash from your great aunt. But these aren’t sources of income, and you shouldn’t just blow them on an extravagant vacation or pricey electronic.
Here are some of the dangerously reliable cash windfalls, and why you should not count on them:
You always get your hopes up come tax time. You expect you’ll get money back from the government, and it’ll be a tidy little sum.
The problem with that expectation is that it’s not always true. In fact, you could end up owing more to the government.
If you’re recently married, your new tax-filing status may bump you into a different tax bracket, meaning you might end up paying more come tax time. Or maybe you got a new job and when you filled out your new hire tax paperwork your withholdings were adjusted so that you break even come tax time—you don’t owe the government any more money, but you don’t get any back either. If you’ve already put a plane ticket to Europe on your credit card with the expectation that you’ll pay it off come tax day, you’ll find yourself in debt with no immediate way to pay it off.
The fix: Pay attention to how much is being withdrawn from your paycheck for state and federal taxes. If it seems like too little—or if you just want to make sure—ask your employer’s accountant if you can double check your withholdings. This is especially important if you got a recent raise or a significant bonus.
Your company thrives more every year, so you’ve come to expect a bonus which you often use to remodel a room in your home, travel, or pay off some debt. But this isn’t a reliable source of income. The day will come when your company simply can’t afford to give its employees bonuses, and you’ll be better off if you haven’t relied on that bonus to supplement your income every year.
The fix: Watch the market. See how your company is doing from week to week. If your employer sends out weekly or monthly newsletters, know what’s happening and how the company’s doing as a whole. And even if you know it’s doing well, don’t count on a bonus. Instead, if a bonus comes, use it to put away into savings or pay off debt.
Aunt Gertrude is always generous when your birthday rolls around. Every year she sends you a nice check and every year you treat yourself to something special. After all, it’s your birthday! But what if one year Aunt Gertrude comes on hard times, or decides to donate your gift to charity in your name instead of cutting you a check?
You can’t count on Aunt Gertrude’s check from year to year, even if you’ve received it consistently for several years now.
The fix: Don’t plan your big purchases around monetary gifts. If you want a new iPad or digital camera, save for it yourself by opening an online savings account and having a set amount automatically withdrawn from your checking account a couple of times a month. It may feel more rewarding to know that you’ve saved up for something you’ve wanted, rather than relied on a birthday check.
Money doesn’t grow on trees, even money you’ve seen as reliable. Don’t count on these cash windfalls from year to year. Plan out your budget and purchases based on your reliable income and build an emergency fund for unexpected situations.
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