Ask HN: How do you change your budget around a big raise?

[mainedotpy]

Recently a side hustle went from 20% of my main job salary to about 100% and has held steady at this level for 3 months. The actual increase in work is trivial.

Our lifestyle was already pretty comfortable and we were saving. I am struggling with how much of this extra cash we should feel good spending on unnecessary-but-joyful splurges such as fancy dinners, cleaning services etc vs how much of this windfall I should just be saving.

I grew up lower middle class and do not have a great financial background.

[themodelplumber]

Nice! I've been in similar shoes before, for a different reason. But I remember it feeling like a really weird and dicey situation. I wasn't sure how to trust myself.

Here's what I learned to do, that worked for me:

- Make a cool spreadsheet for yourself and run little experiments to see what works. Never trust a single, fixed number for savings, spending, anything. Life and emotions are way more nuanced than that, and part of you (especially the I'm My Own Person Now part) will practically yearn to disobey those unreasonably-fixed orders.

- The spreadsheet should include projections, so you can adjust some numbers and see the results as they would turn out in a year or so.

- When you notice lifestyle-overage issues, or shortfalls, accept it, make adjustments to the spreadsheet logic that may help, and don't scold yourself too much.

- Splurge, always splurge to some degree. Splurge early and often.

- When your splurging is over and you're going "why did I do that, man what a stupid day/week/month" that's the perfect time to head to the spreadsheet and set some very simple guardrails that may be helpful next time.

- Some guardrails that can help a lot are things like automatic reinvestments and automatic withdrawals to places like brokerages.

Just some ideas from my own experience, in case they help. Good luck...and congrats!

[bern4444]

To add, if you need some structure in setting up a budget, there’s a tool to help manage this and track expenses against that budget called YNAB (You Need A Budget).

I find it incredibly helpful for making sure I’m spending money the way I intend to. It’s very easy to otherwise forget how much is going where.

[dieselgate]

Haven’t seen much advice like this on HN but there are financial sub reddits related to this, which I would recommend looking into if you haven’t before. Typically the order of operations, from a high level, for a windfall or large cash flow increase is: Pay off all debt < 6 month + emergency fund < invest < …? Best of luck to you

Edit: the above didn’t really answer your specific question about “how much” to allocate to saving vs spending. Kind of a tough thing to put a number on but save more than spend

[paulpauper]

6 months seems like too much. You're sacrificing long-term market returns that could be invested.

[LeafItAlone]

As others have mentioned: the length of time will vary from person to person based on their comfort level and responsibilities. Guaranteeing that you have 6 months to find a new job, foot a surprise medical bill, or otherwise provide for your family, but mana not getting the best returns, might be worth it to someone to avoid the stress associated with those events. The point is that it’s at a level you are comfortable with and that’s going to be different by person.

[bern4444]

This "6 months" time frame is different for everyone - I keep over a year in cash.

Not even bonds/CDs - just a high yield account. It is instantly accessible when I need it.

If and when the market ever drops 30+% and a recession starts to loom (seems pretty close to what's going on now) - I never have to worry will I be okay, what if I lose my job, what if I get hit with some massive unexpected expense.

I have money in the bank to get me through it all. I won't be forced to sell any equity at a time when its worth a lot less, I won't have to change my lifestyle one iota.

That security is worth the potential loss of future gains. I already have a lot in the market anyway and I keep adding more.

I'm also single with no kids so 1+ year in cash looks very different for me vs someone married with kids and all the associated costs. Even so, it's an approach I find very comforting and I hope to maintain when I'm further along.

[dieselgate]

6 month emergency fund isn’t my personal idea but it’s common advice. And there’s nothing stopping someone from keeping it in a brokerage account

[kradeelav]

From what I've heard, 6mo is set as such in the case if somebody gets laid off and it takes that long for them to find another job - so they have exactly that amount of raw cash to survive on for rent/food/miscellaneous.

Also medical bills tend to be twice as expensive as what you'd think they are, so a single medical incident can wipe out a solid chunk of that 6mo net.

[muzani]

I think trying to save money is the wrong mindset. Life should continue as is. Put aside what you don't need.

If you start spending, you'll keep spending. Once you taste the fancy butter and breakfast on organic non-bleached sourdough, going back to margarine on toast makes you unhappy.

Money, like food, is dangerous. If you're comfortable, more of it just makes you 'fat'. It's harder to dial back to being acsetic later.

However, going through the journey of opulence is something people should try. Buy the expensive chocolates, eat the steaks with gold leaf, sleep at top hotels for absolutely no reason, buy flights to visit the crowded wonders of the world. Just manage expectations that this indulgence is not the peak of your life, but rather a low point.

[WheelsAtLarge]

Seems to me that the new money can be used to set up an emergency fund and adding to your retirement fund. If you have kids set up a college fund.

Once you get that out of the way, use the money to fund activities that will add to your well being. Careful with adding stuff to your life. Ultimately you will need to take care of it. Many people become slaves to it and the more you have the more you will have to take care of.

[vivegi]

In general, paying off debt (if any) first is good.

If you have money left after paying off debt, pick a % of the temporary windfall that you are comfortable spending and spend it (doesn't matter what categories you want to spend them as long as they are meaningful to you).

Take the remaining and save it. Since you say you are already saving, just add this on to those same saving instruments.

You can apply this principle to any incremental dollar received over your average base income eg: annual raises, bonuses, cash gifts, winnings, inheritance etc.,

Your saving (or investment) pattern i.e., which savings/investment instruments you choose depends on your risk profile.

[RicoElectrico]

If you have a new-ish mortgage, then overpaying it is OP. If you're only overpaying the principal, it reduces not only the repayment period, but also interest the bank would accrue.

[josh3736]

This very much depends, and probably isn't a good idea. Mortgages are some of the cheapest loans you can get.

You'll almost always be better off putting your extra cash into index funds instead of overpaying a mortgage.

Index funds historically return ~7% long-term, while your mortgage will likely be 3-5%. By overpaying a mortgage, you're missing out on an extra 2-4%: it's better to pay ~4% in order to get a gain of ~7% elsewhere.

Not to mention that every cent you put in to your mortgage is now locked in to your home equity, meaning it's difficult to access that money if you need it. You can sell your stock holdings and have the cash in a matter of days. Accessing the money you put in to mortgage repayment probably means taking out a HELOC or similar, which takes time and requires getting approved for the loan. If you're in a particularly bad situation, this might not even be plausible. And you'll pay extra interest for the privilege of accessing your own wealth.

On top of all of that, the tax implications are bad too. Long-term capital gains rates are low. Mortgage interest you pay is deductible. You lose both those benefits by overpaying your mortgage instead of investing the cash.

Of course, in fairness, early repaying a mortgage is a guaranteed return of 4%, while investing in the markets carries risk. However, in OP's situation—where they likely won't need any of this extra cash on short notice—you can ride out down markets and sell once they've recovered.

[bmitc]

On paper and in a theoretical sense, yes, mortgages are the largest and cheapest loans normal people can get and investing is the mathematical play. However, such advice does not take into account risk. There is much higher risk in having a mortgage than not having a mortgage. There is additional risk in having a mortgage plus investing your savings. If someone is making double their salary, then they could pay off a reasonable house (say up to ~$1M) in a decade or so. That is a huge amount of burden and risk that gets reduced, which doesn't take into consideration the emotional and stress release.

Also, people often say that you shouldn't invest money that you don't need in less than five years. The present time is a good example of that. So, treating securities investments as liquid in periods smaller than that is dangerous.

Assessing potential risk is just as important as assessing gains.

[josh3736]

Of course one needs to assess the relative risks of your different options, and no one said that investing is risk-free. However, I must disagree with this premise.

What exactly is the "much higher" risk of having vs not having a mortgage? There shouldn't be any management overhead; put it on autopay and you don't need to think about it. I'm guessing you mean the risk of default in the event you find yourself unable to make the monthly payments, and consequentially losing your house.

Sure, the type of person who thinks solely in terms of monthly payments and wins a big chunk of change in the lotto would be well-advised to pay off their mortgage because (speaking in generalizations) they aren't making great financial decisions in the first place.

If you manage your finances prudently, I don't see simply having a mortgage as a major factor when comparing the risks of investing excess cash vs paying down the mortgage.

In a nightmare scenario, where you've invested all your excess cash and then find yourself unable to make mortgage payments in a down market, you still have the investments to draw on. Sure, you may be rather unhappy about taking a 20% haircut every month to make your mortgage payment, but you won't lose your house.

Plus, you'd still have other options in this scenario. Maybe you can negotiate temporarily reduced or interest-only payments. After all, your bank would probably prefer to not risk losing a sizeable chunk of their principal in a foreclosure. In a more systemic crash, maybe there's government assistance, deferment, or the like available (eg see 2008's https://en.wikipedia.org/wiki/Housing_and_Economic_Recovery_...).

And just because one doesn't have a mortgage doesn't make you immune to the risk of losing your home. You're still on the hook for property tax payments, and failing to manage those will end the same way.

Of course, this all assumes you're otherwise making good financial decisions anyway. Your mortgage should be affordable when you're making 100% of your normal and expected salary, and that you haven't bought too much house because you suddenly find yourself making 200%.

We should also understand that not everyone approaches personal finance the same way. I simply don't view a mortgage as some kind of existential stressor, and cannot relate to the "emotional burden" you allude to. It's just one other line item in the budget.

On the other hand, my other half hates even thinking about finances, and would certainly get anxious thinking about and trying to manage this kind of stuff — that's why I deal with it :)

For someone like that, I can understand how eliminating a mortgage can have value to them, for the reasons you describe. However, we must admit that this isn't exactly a rational thing, and it's not doing anyone any favors to pretend otherwise.

Let's run some basic numbers:

With a $1m loan at 4% APR over 30 years, you will end up paying $719k in interest.

This $1m loan will have a monthly payment of $4,774. Let's say you were to double your monthly mortgage payment, and pay $9.5k every month. This would get you paid off in ~11 years, and reduce your total interest paid to $232k, a 'return' of $487k over a decade.

On the other hand, if you paid your mortgage for 30 years and you invested your extra $4,774 (assuming VTI's average historical return of 9.81%), you'd end up with $10.5m, a return of $8.8m over 30 years.

Now contrast with paying off your mortgage in 11 years and then investing $9.5k every month for the following 19 years. You'll end up with $6.4m, a return of $4.2m.

$487k in interest savings + $4.2m of investment returns = $4.7m total return

Is paying your mortgage off early really worth $4,100,000 to you?

[hnfong]

Your approach is logically equivalent with buying ETFs on a margin. Such leveraged positions are considered inherently "risky".

Everyone handles risk differently, for some people a 1% risk of a small loss might not be acceptable, whereas some other people essentially gamble their life savings. I'm sure your risk profile is "socially acceptable", but I think you're missing the main point of GP, i.e. there's additional risks that shouldn't be dismissed with an offhand remark.

I'll also note that such leveraged positions make the assumption that: (1) you will continue to have a stable stream of income for mortgage repayment, (2) the stock market trends upward, (3) property markets won't fall dramatically, (4) interest rates won't rise dramatically.

They sound rather independent at first but when the economy crashes those things suddenly happen all at once. As you may know, the economy crashes every once a while, and from a "frequentist" perspective something like this happening in the next 5 years is probably in the order of 1%-5%.

That said, I'll grant you that the advantage of these leveraged positions are that it's "socially acceptable" to take the risk. No sympathy for those who gamble away their savings in a casino, but the class of people who became homeless because they speculated in the stock market instead of repaying their mortgages might get a bailout with public funds if they're lucky.

[mixmastamyk]

Yes you can get better returns in the market, but owning a home is an investment in life. As Charles Schwab once said in an old book of his. (Sure it depends.)

[roland35]

Congrats! I am asking myself the same question after getting a nice raise as well. Here is where my thinking is currently:

1. Don't make any sudden changes! Think for a least a month before making any big purchase, sometimes it still is desirable after waiting, sometimes it is not! You got this far without it so far, so another month isn't a big deal.

2. Use a tool like projectionlab.com or a spreadsheet to calculate how much you want to be saving for retirement. If you're maxing out tax-advantaged accounts that is pretty good already, but it is good to have a target for how much to save each year on top of that.

3. Try to keep your "burn rate" low. I think it is better to try and keep your long term recurring costs based off of your old salary as long as possible. Pay cash for any fun things, so if you lost your job tomorrow you don't have big obligations like a huge mortgage or lease payments.

The term I heard is HENRY - High Earner, Not Rich Yet! A lot of people spend it as soon as they make it and never accumulate wealth.

[mixmastamyk]

Wouldn’t do anything in the short term. Sure have a bit of fun here and there, but focus should be on early retirement, maybe Uni for the kids. Don’t take on a lot of bills or you’ll end up like MC Hammer. :-D

[evanmoran]

What I’d recommend isn’t to be perfect, but to put a piece of it in useful places with automatic payments. This way the system is easy to setup once and will be pretty good over a long term. So if you’re in the US pay off all cc debt and then max your retirement options (401k and Roth both). This reduces taxable earnings. If you have more after that do a monthly contribution to an index fund. This will be a good starting point and will keep your bank account looking more like it has to this point.

[LeafItAlone]

This is good advice to me. I’d also add that if there are areas of your life that you think need improvement, don’t forget to improve your life. Keep it in check and avoid lifestyle creep, but if you’re constantly unhappy with something, some might argue what’s the point of all of that saving?

[LeafItAlone]

In addition to all of the very good saving and investing advice you’ve received so far (which should be followed), remember that some experiences are easier and more enjoyable while young. You could invest it all and live a very comfortable life in retirement, but things like traveling and other physical activities get harder to do and you likely have less time to check off your bucket list. Use some to enjoy life now, if that’s what you want.

[asojfdowgh]

budget the same, 3 months isn't enough to say its going to stay there for a year.

Good dinners are more affordable than fancy ones (even if you eat out for both, you get more for your money at an "average" restaurant than a top class one that exists only to show other people how much money one has).

I'd mainly focus on the things that take up at minimum 1/5th of your lives: Bed quality is nice to improve, keyboard/mouse/screen/computer, shoes, etc.

whatever amount spent, just make sure your savings are always increasing, the faster the better, but don't feel the need to over-do it.

but past that, invest a portion of your savings, since banks rarely meet inflation rates.

Index funds, housing, crypto if you feel daring, etc, don't invest too much (especially if monkeypox becomes a full-blown thing), but also don't invest too little, (or you are basically losing money over time)

and then through that, your retirement will arrive earlier

[randycupertino]

Pretend I never got a raise, set the new portion of my salary to go straight into savings so I don't see it in my paycheck, stash it away and keep living frugally.

Maybe enjoy some extra travel but otherwise I try to be pretty anti-consumption soas not to get swept up in the hedonistic treadmill involved with keeping up with the Joneses.

[drdo]

Since I'm happy with my current lifestyle, I simply increase the fixed amount that I invest in broad index funds.

[alhirzel]

Read Mr. Money Mustache - https://www.mrmoneymustache.com/category/mmm-classics/

[mainedotpy]

Great recommendation overall. I love his stuff.

I’m not in the extreme thrift camp but we have no debt aside from mortgage and aren’t into conspicuous consumption. Our van is an 03.

[newusertoday]

i would spend 50-50 i.e. 50% on splurge and 50% on investments. On splurging fancy dinner, cleaning services are ok but taking new car is not ok as it increases the budget year over year so go for one time things like vacation etc. but avoid permanent lifestyle upgrade with the uncertain windfall.

[Fargoan]

Get into modular synths and you won't have to worry about the extra money.