306 | Windfalls and Wealth-Building

How do you handle tax refunds and bonuses?

Many lawyers look forward to these infusions of cash each year.

But what you do with them says a lot about your ability to build wealth.

In this episode, let’s talk about the common ways people handle windfalls and how each impacts your ability to build wealth.

• • two kinds of people when thinking about windfalls
  • how each group handles windfalls
  • the impact of the way each group handles windfalls
  • shifting your view on windfalls to build wealth and create more freedom

• Apply for a strategy session

You’re listening to Personal Finance for Lawyers. I’m Rho Thomas, and as a busy wife, mom, and former Biglaw associate, I know all too well the tension between the culture of the legal profession and pretty much everything else you want to do in life. That’s why each week, I’m bringing you the information and tools you need to improve your money mindset and manage your money to create true wealth. Because ultimately, it’s not about the money. It’s about the freedom and flexibility the money affords.

Hey friend. Welcome back.

Today, we are talking about how you handle extra money. As I’m recording this, we are in the midst of tax season, so people are getting refunds and things like that.

But even if you don’t get a tax refund, I want you to think about other times that you’ve gotten extra money, such as a bonus.

So thinking about the last time you got a refund or a bonus or some sort of windfall, think about what you did with that money.

Did you have a list of things that you were ready to purchase, all the things that you have been putting off and you were ready to spend that money as soon as you got it? Or did you have a list of goals and things like that that you knew you wanted to fund with that money?

The reason I bring that up is because getting those windfalls, getting that surplus money, it really shows you what your true financial habits are or where your mindset is with respect to your money.

And this is not about judging what you’ve done or anything like that. I just want to make you aware of the way that you’re thinking about money and how it impacts your ability to build wealth.

There are two groups of people when you’re thinking about these kinds of surpluses or windfalls. There are those of us who are ready to spend the money as soon as they get, and there are those of us who are ready to build with that money or make progress on their goals with that money.

On the spend side, it is those people who see that extra money as an opportunity to upgrade their lifestyle, to do this thing that they’ve been putting off or buy this thing that they’ve been putting off.

Often there’s already a list of things that they are ready to buy before the money even arrives, and they’re already planning how they’re going to spend it. That extra money gives them permission to indulge. It gives them permission to treat themselves.

On the other side, those people who use their extra money as progress, they use that extra money to fuel their goals, they might have a list as well, but they’ve got a list of things that they want to do. I’m going to pay this thing off. I’m going to put this much in this account. I’m going to invest in that thing.

They might still take some for pleasure, for indulgence, but the majority of it is going towards that progress. So for them, the extra money is acceleration. They’re already on this plan. They’re already moving forward with whatever their goals are, and that extra helps them get there faster.

When you are in that spend group, a lot of times you stay stuck in a cycle. I know that we’ve talked before about people feeling like they’re treading water. This is why. Where you get that extra money and immediately it’s out the door, it’s spent on some new thing, on some experience, that kind of thing. When you have this pre spending checklist in your head of all the stuff that you’re gonna buy, the money is gone before it’s even real, before you even actually have it.

And something that I tell my clients all the time is, let’s not spend the money before you even get it. This is where lifestyle creep comes in. So we’ve talked about how a lot of times we get these increases, we get raises, we get bonuses, and instead of making a plan for it, instead of using that to fund our goals, we use it to fund our lifestyle instead. But what happens then is now our lifestyle becomes more and more expensive.

That baseline that we need to cover our living expenses rises over the years as things that we once considered luxuries are now necessities. They are just baseline spending. So when you’re in that spend side of like, anytime you get a bonus or a refund or a raise, you’re thinking of the next thing you’re going to buy, that creates that lifestyle creep.

If it feels like, every time you get a raise, it’s not enough. This is part of part of that. Look at what’s happening as you get those raises, as you get bonuses. Look at how you’re thinking about surplus money. Is it a way to consume more, to buy more things, to fund the lifestyle? Or is it something that you’re using to move yourself forward?

So if we contrast what’s happening on the spend side, if we look at people who are using their surplus to create wealth, to make progress on their goals, they are not looking at the surplus as lifestyle. They are looking at that surplus as acceleration, as leverage, as allowing them to do things that they want to do faster.

They already have a plan. They already have their goals set, and they are already moving toward those goals, and now having this surplus money come in, I’m able to meet that goal faster than originally planned. I thought it was going to take me until next year, but now I’m going to be able to do it by the end of this year, because I got this windfall, and I put it towards my goals.

Again, you might still take some of that money to enjoy your life, to buy something that you’ve been wanting, to do some experience that you wanted to do, but you don’t do so much that you don’t have anything left. You take a portion of it for the lifestyle, for the enjoyment, whatever, but you use the rest of it for things like building your savings, for investing, for paying down debt, for things like that, where you are making progress towards your goals, but not completely neglecting enjoying your life as well.

Also, the enjoyment there is intentional. So it’s not just checking off this laundry list of stuff that you’ve been waiting all year to buy until your bonus came, or until the refund came. There is this one thing or this couple of things that you want to get, and you’ve already determined how much you’re willing to spend. Not spending the entire thing. I’m spending this portion of it and putting the rest of it towards my goals.

The main idea here is thinking about those windfalls as a way to move you closer to freedom, closer to the goals that you have, the options that we talk about a lot. What if you started looking at that money as a way to create more options in your life, instead of pushing you further into that cycle where you’re dependent on your income?

Because that’s what’s happening if you always spend the money and you’re taking on new obligations or buying new things, and the money is just gone, it can’t move you closer to the options and the freedom.

So what if, instead of looking at it as a way to treat yourself immediately, you look at it instead as a way to move yourself closer to the goals that you have and the freedom that you want? That kind of shift in thinking is available regardless of where you are with your income. Because we’re thinking about, how do I make progress on the plans that I have faster? What are the decisions that I need to make that move me closer to these goals, rather than further away?

If you know that you’re working toward paying off this credit card, or you’re working toward building your emergency fund to X amount, or building up a down payment, or growing your investments, you can have just a plan in place that says I’m gonna take 20%, and I’m gonna treat myself, and and then the other 80% is going on paying this credit card or paying those student loans or building my savings or whatever.

And when you start thinking about your money that way, then you will start to see a lot more progress, and stop feeling stuck or feeling like you’re treading water. You will see that your debt balances are going down; your bank account balances are going up; and you are achieving your goals. And at the end of the day, when you’re achieving those financial goals, you are moving yourself closer to freedom and having more options.

And if you’d like help with moving toward your goals, you can head to rhothomas.com/apply, and we can talk through what the plan is to get you from where you are now to the goals that you have and where you want to be.

Alright so that is it for this week’s episode. Thank you for listening.

If you haven’t done so already, please subscribe to the show, leave a review. Both of those things help the show to be seen by more people. The podcast platforms see people subscribing, see people leaving reviews, and they show that the show is valuable, which means that the podcast platforms push it out to more people. As always, I appreciate your support.

As we close out, friend, I pray that you take the information you learn here, apply it in your life, and open up to the realization that wealth is available to you. As you do that consistently, week after week, you’ll continue to take steps to take back control of your time, build wealth, and live life of freedom and choice you deserve. Talk to you later.