You have been paying off your new iPhone for two years and it has now been fully paid off and come off your bill: your phone bill is now $30 less every month. You happen to be a lucky (or good employee) who just got a 5% raise to their salary. Or maybe you are a good driver and your new insurance premium is $40 lower per month.
These are all examples of new money coming to your budget. Not a bad position to be in, especially if your budget was already stretched to the last penny.
The natural question that comes to mind is: what do you do with this new extra money, assuming it is anywhere from $25 to $50 per paycheck (bi-weekly pay) ? do you just spend it? do you save it? or maybe a combination of these and others? First off, and unless you already fulfill your other obligations in terms of saving and have no debt to pay off, the worst use would be to just spend it. This is money you never had it so you can’t just spend it. There are much better ways to put it to use instead:
Start or increase charitable giving
There is an inspirational meme I came across recently: “when god blesses you financially don’t raise your standard of living, raise your standard of giving instead”. So instead of wasting this extra money, dedicate some or all of it to charity. Assuming you have an extra $40 in your budget, that would be barely enough for a dinner night out for two, whereas dedicating it to charity would go a long way and feed many people at once.
Pay off Debt
Unless your debt is $1000 or less, getting an extra $25-50 in your budget and using it to pay off debt, may not be significant enough if your debt is a lot bigger (say in the tens of thousands) . But if you weren’t paying enough towards your debt reduction, then it makes sense to dedicate this newly found money to go towards that. For example, if you were only paying $35 per paycheck, you could double that to $70 which means you are now paying close to $2K towards your debt elimination.
Saving and Investing
I often tell friends and family that you can never save or invest enough money. The more the better. The higher the amount your save and invest, the faster you get to financial freedom and independence. So while putting an extra $650 to $1000 towards saving and investing each year may not seem like a lot, it does when it is being added on top of existing money that you set aside for this purpose. For example, if you were saving just over $4K a year, adding an extra $700 a year will put you over $5K a year and with the passage of time and magic of compounding, your money will exponentially increase after just a few years.
When new money comes to you or is freed up from your budget, you are free to spend it as you like, since it is your money after all. But there are better uses for it than to just spend it. Think of this as money you never had, hence it doesn’t make sense to just blow it on useless purchases. Instead, think of helping others, paying off debt or long term in the form of investments. Any one of these will have huge positive impact and returns for years to come.