From time to time, extra money may come into our account. It could be a gift, a thirteenth salary, a bonus at work, or even a raise. What should we do in these situations?
The general principle: always save as much of your extra money as possible.
Those who want a financially secure life should always set aside a portion of the extra money they receive. And preferably the largest portion of it. Keep this in mind: it’s important to avoid increasing expenses in proportion to the extra income, a path followed by most people.
Why is this general principle so difficult to apply? Because most people lack the discipline to follow it. They lived relatively well on their current salary, and upon receiving a raise, they automatically adapt their lifestyle to it.
This is for two reasons. The first is the natural adaptation to a new standard. It’s easy to adapt to a better situation, and it’s natural for us to try to make the most of it.
Secondly, most people feel the need to use the extra money for the simple reason that they already needed it to organize their financial lives. The previous financial norm was already unsustainable because costs were already higher than income from the outset. When the extra money comes in, it’s immediately allocated to cover the shortfall. And this is only because there was no discipline to live, always below the financial norm granted by the monthly income.
Define how to save extra income
The general principle is this: always save as much of the extra money as you receive. But how do you define savings? To answer this question, it’s important to distinguish between any extra income and a solid extra income.
If you earned a bonus at work (or your thirteenth, for example), you may have extra income. You won’t receive it in the coming months, so you can’t use it to incur excessive expenses, as this could affect your future financial health. In this sense, the ideal is to save as much of your income as possible. Save 80 to 90 percent of all potential additional income to avoid compromising future income.
On the other hand, when the additional income is constant, the principle applies differently. What is constant extra income? It could be a raise (which is "extra income" if we consider that what was received before was the default amount), a promotion at work, or anything that increases the income you incorporate over the long term.
Then I could do the following:
Adding more, rather than increasing spending: It’s common for many employees (and even some entrepreneurs) to increase their standard of living, equal to or greater than the increase in rent. Therefore, one has more money, but in terms of real assets, one is poorer.
So it is recommended that those receiving a raise avoid the temptation of their spending level.
Eliminate your debts: When you’re looking to earn a better salary, one of your first steps should be to eliminate all outstanding debts to avoid paying interest to banks and financial institutions.
Having debt in the country with the highest interest rates in the world is definitely not a good idea. Our debts, especially consumer debts, are real "cash drains."
Retirement: Extra money can also be used to achieve a more comfortable retirement. But keep in mind that investment interest rates may decline over the long term, especially if the economy grows as expected and the government lowers the Selic (base rate).
