Congratulations! You’ve just received a promotion and with it, some extra income. With that sudden influx of cash, it can be tempting to immediately devote all of it to lifestyle improvements, like leasing a new car, upgrading to a bigger cable package or moving to a larger living space. After all, investing in a new car is way more exciting than socking it away in your emergency fund or allocating an additional 1% to your TSP or other retirement plan. So, how do you make sure you can still have fun with some of that new income, while continuing to boost your family’s overall financial health?
It’s surprisingly easy using the 50/50 formula. No matter the size of your raise, commit to always splitting the amount of the pay increase evenly between two categories: lifestyle upgrades and financial wellbeing.
Making the 50/50 Formula Work
Let’s say that after a raise, you have an additional $500 per month. Following the 50/50 rule, you’ll devote $250 a month to your financial goals. But that still leaves $250 for lifestyle upgrades! Now comes the fun part: deciding exactly how you want to allocate the money. Think of it as planning how you get to enjoy the fruit of your efforts right now (like increasing your monthly “going out” budget, subscribing to a meal delivery service, or joining a gym) and in the future (like saving toward a house down payment, funding your child’s education, or building that retirement nest egg).
Why It Works
Listen, we’ve been in the financial services business for 60 years, so we know from experience that people are more likely to adopt better financial behaviors if it’s easy and convenient to do so. The 50/50 formula makes readjusting your budget easy to calculate and easy to stick to – for this raise and every pay increase that comes your way in the future. You still get to look forward to enjoying the immediate gratification of having some extra cash, but you also get to enjoy the long-term satisfaction and peace of mind that comes with accomplishing an important goal.