The First Time You Spend Less Than You Earn… and How to Handle It

man holding crumbled hundred dollar bills

You scrimped, saved, and sacrificed, and for the first time ever you finished the month with money left over. Now what?

In my eyes, the fundamental rule of personal finance is spend less than you earn. Do that each month and each year and you’re going to be in good financial shape. You can really dig deep, make that gap between your income and spending big, and hit your financial goals quickly, or you can take it slowly and build just a small gap that will still take you where you want to go.

No matter what, you’ve got to start somewhere.

One of the first really sweet milestones for me was the first time I realized I had actually spent significantly less than I earned over the course of a month. It was during May 2006 and I had noted that during that month, I had paid all of my bills and even made a large payment on one of my credit cards and still had more in my checking account at the end of the month than at the start without any of my credit card balances going up at all.

It felt fantastic. It was truly one of the first times where I had really seen my day-to-day frugality efforts add up to anything. I had spent almost every day that month trying to cut back on unnecessary spending, but I hadn’t really seen the big results of it yet. That day, when I had several hundred more dollars in my checking account than I did at the start of the month, I saw it plain and clear.

The problem was that my initial response to having that money was to want to celebrate. Although I had been making good choices for several weeks in a row, my bad spending tendencies were still present. My instinctive reaction to this positive personal news was to go out and buy something – some drinks, a meal at a restaurant, an item or two that I had denied to myself during that month.

Celebrating in that way would directly undo at least some of the effort and some of the positive results. It would be akin to celebrating two weeks of careful dieting by eating an entire large pizza and a bucket of ice cream, or celebrating a month of an exercise routine with a week of complete vegetation. Sure, you’re celebrating a good result, but you’re actually undoing at least some of your good efforts.

So, what do you do? How do you celebrate? How do you intelligently channel those proceeds? Let’s tackle those questions individually.

Celebrating Your First Financial Successes Sensibly

Almost everyone who finds themselves in a situation where they need a financial turnaround also finds themselves with some pretty terrible spending habits. In their past, they’ve spent a lot of money foolishly, which has resulted in a pile of debts and some life patterns that aren’t headed in a good direction.

I know that certainly describes me. My spending habits in 2004, 2005, and early 2006 were atrocious. I would find reasons to celebrate things constantly, and that celebration meant buying stuff – books, video games, DVDs, food, and so on. If something – anything – good happened in my life, I celebrated with purchases.

It was pretty obvious that I needed to unlink spending choices from my desire to celebrate personal achievements. Celebrating everything with a bunch of spending was really hindering my financial state, and this was obviously going to be particularly true if the celebration was in honor of being responsible with my spending. I needed to unlink celebrating and spending in general, and this was never more true than with my desire to celebrate my better financial choices.

So, how does one celebrate financial success in a more sensible fashion? Here’s how I do it.

I celebrate with time. My typical method of celebrating some kind of success in my life is to wall off a block of time – usually a full day on a weekend – for some sort of activity that’s completely for my own enjoyment or enrichment, without any guilt for doing so.

For example, whenever I complete a professional project or goal, it’s really tempting to celebrate. Instead of opening up my wallet, though, I open up my time. I give myself the personal freedom to just enjoy an afternoon or a day without facing the often-endless list of home maintenance and other household tasks or professional tasks or community obligations.

It truly is the best gift that I give myself. I enjoy my “free” Saturdays a lot, as it’s my time to get lost in a project.

I celebrate with an adventure (usually with my kids, but sometimes without them). Often, this is a shorter excursion than the full day I mention above – usually, it’s an afternoon starting with a picnic lunch and ending with a return home for a meal already prepared in the slow cooker – but it’s an afternoon spent doing something outside, exploring someplace new.

Usually, it’s a trip to a nearby state park. One of my goals is to spend time exploring every state park in Iowa, but we often wind up exploring the areas of some of the central Iowa parks, like Big Creek or Ledges.

We’ll just pick a trail and start wandering. Sometimes, if it’s okay, we’ll just leave the trail and start exploring cross country. We’ll go up hills and down hills. We’ll look for beautiful lookout points or interesting trees. We’ll listen for bird sounds. We’ll get out of breath going up and down hills. Sometimes, we’ll slip in some loose dirt or mud and wind up going home caked in dirt.

Yet, somehow, it’s incredibly relaxing. I go home from these trips feeling great every single time. The best part? It doesn’t cost much at all.

I celebrate with my wife. We’ve been married for twelve years and have three children, yet there’s still no one I’d rather hold close and share my thoughts and secrets with. Her humor, grace, and beauty are simply unparalleled in my eyes, and there’s just no better way to celebrate a big event than to do almost anything with her by my side. Spend time with the people you enjoy and love the most and it will always feel celebratory.

Channeling Your Money Smartly

So, you’ve got that extra money and it feels good. Even better, you’ve become smart enough to realize that you don’t need to use any of that money to celebrate your success.

But, still…

You have money sitting there in that account. It’s more than you had at the start of the month. What do you do with it? What’s the smartest move?

First of all, don’t get caught up very much on what the “smartest” move is. That’s a fool’s errand, because most of the reasonably good things you could do with that money could end up being the “smartest” thing, but it all relies on factors that still lie in the future. What you should always focus on is doing something good with your extra money and don’t worry about what the best move is, because the “best” move relies on future events, on your own risk tolerance, and on a bunch of additional factors that are basically irrelevant.

You’re always better off pulling the trigger on a good financial choice than getting locked down in analysis paralysis while searching for the best financial choice.

So, what are some of the good choice? It turns out there’s actually a lot of them. Here are fifteen smart things to do with that extra money in your checking account at the end of your first month of smart financial choices. All of these are good ideas, though some might be better ideas for specific people in specific situations.

1. Build an emergency fund. Simply transfer the extra money you didn’t spend this month into your savings account, leaving your checking account at the same level it was at the start of the month. That way, if an emergency occurs in the future – like identity theft or a car problem or something else – you have cash you can tap to just take care of the problem without some kind of personal or financial crisis. This is probably my default recommendation for most people, so if nothing else here really makes perfect sense for you, go for an emergency fund.

2. Make an extra payment on your highest interest debt. Got debts? Use that extra money to make an additional payment on your high interest debt. The next time you go to make a payment on that debt, add your extra money to that payment. If your regular bill is $50, for example, and you have $200 extra in your account, make a $250 payment that month. You’ll knock off some of the principal, which means that you’ll have a smaller balance and thus less interest to pay in future months.

3. Make a few bulk purchases of your most frequently used nonperishable items. One of the things that people often do when they’re struggling to make ends meet is that they buy small packages of items that they use all the time, like garbage bags or toilet paper. The small package is cheaper, don’t get me wrong, but the larger package is almost always cheaper per use. Take the cost of the package and divide it by the number of bags or the number of rolls enclosed and you’ll quickly see that the big package is almost always cheaper over the long haul. So, take that extra money and splurge for some of the big packages. You won’t have the consistent need to buy things like trash bags or paper towels, plus you’ll actually spend less on them over the long haul.

4. Replace some of your home light bulbs with LEDs. Another really smart frugal item that many people skip when they’re financially tight are LED light bulbs. LED bulbs have far longer lifespans than ordinary incandescent bulbs and they gobble far less electricity per hour of use, which means that they will cut back on your energy bill as well. LEDs typically save more than $100 per bulb over their lifetime compared to the number of incandescent bulbs and the electricity they’ll eat over the same period. The catch? LEDs have a higher up-front cost. Of course, with a little extra money in your account, you can now cover that up-front cost, which will reduce your energy bills moving forward and also eliminate a lot of future incandescent bulb purchases.

5. Make a contribution to your Roth IRA. A Roth IRA is a way for almost anyone to save money for retirement – and it’s really easy to set up. You can do it online, in fact; most investment houses and brokerages make this quite easy, basically as easy as a savings account. Of course, a Roth IRA is useless without money to put into that account, and that’s where your extra money comes in. That cash is perfect for building up a Roth IRA and making your eventual retirement just a little bit easier.

6. Fill the tank in each of your cars. How does this save you money, you might ask? What this actually does is that it moves an expense that will occur in the next month – a fill-up – to this month, making next month have even more breathing room. That can be a very good move if you know next month might have some extra expenses or travel or other unusual features.

7. Take care of any auto maintenance that’s due or past due, like an oil change. However, if you’re looking at your car, a better move for the long term might be to take care of maintenance on it so that you can extend its lifespan. Getting regular maintenance, such as oil changes and new brake pads, is essential for extending the life of your automobile and squeezing many more miles out of it before critical parts fail. So use some of that money to take care of basic maintenance on your car. Give it an oil change or whatever else it might need – if you’re not sure, check the manual as it will tell you what’s needed at your current mileage.

8. Buy some of the holiday gifts you’re going to give this year. The holidays are always coming, and for most of us, that means buying a bunch of gifts for family members and friends. Sure, some of them can be homemade – we often do that – but you’re still going to be facing at least some costs related to the holidays. So, buy a few items now, or sock some of the money away for the holiday season. That way, you’re not stuck panicking about how you’re going to be able to afford the gifts you’re obligated to give.

9. Pay for an irregular bill, like an insurance bill or an estimated tax payment. Most of us have bills in our lives that are outside of the normal monthly billing cycle. Insurance. Property taxes. Quarterly estimated income taxes. These things pop up sometimes when you least expect them, wreaking havoc with your financial plans. Nip that in the bud right away by taking care of those expenses now, either by paying the bill immediately or by saving money for that bill in your savings account.

10. Take care of upcoming travel expenses. Do you fly somewhere for the holidays? Maybe you have a wedding you’re going to later this year or next year. Whatever the reason, you might very well have some travel expenses coming up in the future that you already know about. Take advantage of that advanced knowledge as well as the extra money you have on hand by buying the ticket now, ideally with a price guarantee involved. That way, the ticket is taken care of and you’re not facing a last minute expense.

11. Save up for an automobile or house down payment. At some point in your future, you’re likely going to need to buy a new car or move into a house (or both). In both cases, a down payment is going to make getting the loan you’ll need much easier as well as making repaying it much easier. Not only are banks going to be more likely to work with you, they’re also more likely to offer you great interest rates on your loans and your total loan will be smaller. So, if you see that kind of expense coming in your future, start saving. You’ll be glad you did.

12. Start planning and saving for future education. Many career-oriented people often consider obtaining more education down the road as a method to increase their earning potential. Of course, doing that is expensive, and it’s that expense that keeps people from pulling the trigger. Right now, you have the first little batch of money that you could use for that education. Put it away in a 529 college savings plan and keep adding to it each month. Eventually, you’ll have enough to pull that trigger.

13. Air seal your home or apartment. Air sealing your home is one of the most cost-effective ways to reduce your energy bills going forward. It keeps warm air from sneaking in during the hot summer months and keeps that same warm air from escaping during the cold winter months. In both cases, that means you can spend less on the cost of keeping your home’s temperature tolerable. Air sealing your home is just a collection of simple tasks like adding caulk to windows (see this great guide), but it does come with a number of little expenses as you’re doing it. Putting your money here will mean that your energy bills are lowered for as long as you keep living in your current residence.

14. Prepay your insurance. Many insurance companies offer a discounted rate for people who pay for the entire year at once rather than making quarterly or monthly payments. So, if you’ve got some extra money, call your insurance company and see whether or not that option is available to you. Not only does this eliminate a bill for a year, it also means you’re going to be spending less per month on that insurance, which means you’ll have more money left over when the calendar flips.

15. If nothing else has a higher priority, save it. What should you do if you already have some of these things under control and the others don’t seem very important in your current life? In that case, just hold onto the money for now. Seek to have even more in your checking at the end of next month and the end of the month after that. Eventually, your life will deal you a challenge or an opportunity to use that money and you’ll be glad that you have it.

Final Thoughts

In the end, financial success boils down to spending less than you earn. It’s all about that rule. If you can repeat it over and over, you will succeed.

Still, following that plan leaves you with leftover money, and you have the power of whether or not to do something smart with those leftovers. Are you going to use them in an intelligent way? Or in a wasteful way?

For starters, it’s pretty wasteful to use that money to celebrate your first steps of success. That’s essentially choosing to waste your efforts. There are many, many better things you can do instead.

Being mindful of your spending and working to maximize your income is just the start of the journey. You’ve also got to be smart about the money you earn but don’t spend.

Good luck.

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