What are you going to do with your next bonus? If your answer is to pay down debt, this episode is for you!
Today, I discuss why you shouldn’t use your bonus to pay off debt. Instead, use that extra income in a more meaningful way that will help you stop needing to utilize debt to cover unexpected (or YOLO) expenses.
Using your bonus to clear debt might give you temporary relief, but you need to understand why you are in debt to avoid being right back in debt by the end of the year. Paying down your debt should be a part of a strategic plan that is not promoted by a large bonus.
I coach my clients to use their bonuses to build a safety fund. Safety funds help you prepare for future expenses so you’re not left swiping your credit card.
Tune into hear why you shouldn’t use your next bonus to pay down debt and learn what to do with it instead:
- [01:40] How paying off debt leaves you vulnerable
- [03:18] Observing spending habits
- [06:19] Debt pay off plan
- [07:09] Build your safety fund
- [10:00] Setting timelines for debt payoff
Tune into this episode of Money Files to learn why you should use your next bonus to build a safety fund.
Are you ready to start asking for help with your finances? Apply to work with me, and let’s start working towards your financial goals.
If you loved this conversation about Why Safety Funds Are More Important Than Paying Off Debt, check out my episode, Optimize Your Earnings: What To Do When You Have Extra Money in Your Paycheck!
Transcript for “Why Safety Funds Are More Important Than Paying Off Debt”
Intro: Hi, and welcome to Money Files. I’m Keina Newell from Wealth Over Now. I work everyday with professional women and solopreneurs to help them get out of financial overwhelm and shame so they can experience more flexibility and ease with their finances. Are you ready to gain confidence and learn to manage your finances intentionally? Tune in and grab financial tips that will help you master the way you think about and manage your finances.
Keina: Hello and welcome back to another episode of Money Files. I am so grateful for you, letting me be in your ears wherever you are. Maybe you’re on a walk or you’re at the gym, putting on your makeup, maybe you’re in the car, but I love knowing that you want to work on your money. So thank you so much for allowing me to be a part of your money team. So today I actually want to talk to you about your bonus and I want to help you manage your next four figure, five figure, or even six figure bonus in a way that feels meaningful and in a way that actually helps move you forward when you think about what your financial goals are.
So right now you’ve probably gotten bonuses in the past or maybe you’re expecting a bonus, whether it’s a signing bonus or you get an annual performance bonus. And if you have some credit card debt and you’ve probably been thinking about how you’re going to use this bonus to pay off some debt. And that seems like a good idea. You’re going to take your bonus, it’s one lump sum. You are going to get instant relief from putting that money towards your debt. But what you might not have considered is that taking your bonus and paying off your debt leaves you vulnerable and it leaves you vulnerable because it leaves you in a position where you’re actually open to incurring more debt.
I mean, my philosophy as a coach, like if you don’t actually know why you’re in debt, you shouldn’t be paying off your debt. I actually want you to know what is a thing, the exact habits, the exact circumstances that are causing you to go into debt. And I want you to address those before you actually pay off debt. But when I work with clients, like when they get a bonus, especially when we’re in the beginning of working together, I’m like, please put the bonus into your savings account, like we’re not talking about it in this call today. And the reason that I ask people to put their bonus to the side is because before working with me, their bonus, they see as something that can change their financial circumstances and that it is this end all, be all solution for them that’s going to make everything change.
But the reason they’re working with me is because they’ve got bonus after bonus after bonus and nothing is changing. And so what we actually work on in my five month coaching partnership is as a coach, I want you to observe your habits. And after we’re observing those habits, we are going to make a plan. And a simple observation of habits could be as simple as looking at grocery store patterns. How often do you go to the store? When you go to the store, how much do you spend? I actually was working with a client the other day and they gave me information for about eight days of spending. And we were just looking at the grocery store number. I said, tell me every time you’ve been to the grocery store, tell me how much you’ve spent.
And they had spent about $450 in about eight days. That number is not good or bad, it’s just a number. And with that number, that number tells me, okay, so you probably spend close to $1500 to $2,000 a month on groceries. That’s an important number to know because it could be something that’s actually contributing to your debt, especially when you put your groceries on your credit card and you think your credit card balance is high because you’ve had a few flat tires that you haven’t been able to pay for. So you use your credit card or you bought some concert tickets and those might be things that are contributing to it, but your groceries could also be contributing to it more so when you are not aware of what your actual habits are.
So if you are still living in 1995 and you think that $200 could buy all of your groceries for the month and you would have money left over, then very much so ca your grocery store trips be adding to your debt. And so observing habits is very important in deciding what to do with a bonus and deciding like, should I actually use this money to pay off my debt or is there a different way? But yeah, when I’m working with clients, I would tell them, put your bonus into your savings account. I want you to observe your habits. Now let’s make an actual plan. So let’s make a spending plan or a budget and let’s get to a place where we can actually adjust your plan and we understand your habits. What are they and does your budget actually reflect the lifestyle that you desire to have and the lifestyle actually that you have and the one that you live, guys?
Because I high tell clients all the time, I’m like, you told me you don’t go out to eat that much but here’s what I’m observing. Once again, not from a judgmental way, but this is your lifestyle. Let’s not ignore it because if we ignore it, what’s going to happen is that you are always going to fail and meet the mark. Let’s talk about it, let’s coach around it and let’s figure out what’s a number that feels really good. Let’s actually look back at some of your goals. Do we need to expand the timeline on these goals? Like let’s have some deeper conversations here. But after we’ve done all of that, so I’ve said, put your bonus to the side. Let’s look at your habits, let’s make a plan then and only then do we start going into a debt payoff plan.
That’s because I want your debt playoff plan to be something that actually results in you being able to pay off your debt. Too many times the clients that come to me, they have paid off their debt and then they’re right back into debt. And it’s simply because they don’t have a plan. They don’t understand themselves as spenders, they don’t understand themselves as savers. And so they haven’t set themselves up to be successful. And my goal as a coach is to make sure that you can have sustainable debt payoff. I would rather it take you nine months instead of six months to pay off debt if it means that you are going to pay off debt in nine months and keep it paid down. That’s the goal. So with your next bonus, I don’t want you to do the one click and pay off everything and get the instant relief. What I actually want you to do is I want you to build your safety funds.
Keina, what is a safety fund? I want you to think about what things do you have coming up in your life in the next week, in the next month, in the next 90 days, that are going to throw your spending off. Think about the things that you have coming up outside of your bills. We know you can pay your bills, you’re good at that, but maybe you committed to going on a trip. Maybe you know you need to get your car fixed because the last time you took it in, they told you, hey, you are going to need four new tires when you come back or maybe there’s something going on with your house and you’ve been needing to get something fixed, but you haven’t had maybe the cash flow to fix it. Or maybe you know what? I have a whole bunch of back-to-back birthdays and I know that I’m not going to say no to my friends, I’m going to go to the birthday parties, I’m going to buy gifts, and so I’m probably going to spend $500 that doesn’t seem like it’s planned.
I want you to think about those things and actually calculate, like I want you to make a list. I want you to calculate, okay, if I need to get some tires, how much is that? Okay, the plumber said that was going to be, $800. I also know that I have a couple events coming up that’s probably going to be like $700. I need you to know I need to go and set aside $4,000. I need $5,000, whatever that number is. But I want you to have that money set aside for your safety funds because on the flip side of this, what I know, if you don’t have the money for it, you’re going to put it on your credit card. And before you use the bonus to pay off your debt, I want you to have considered the things that are coming up in your life that are underfunded and that you don’t have the money for because I don’t want you just paying off your debt and clearing your debt to then just add right back to it.
It’s going to affirm a belief for you that you have about yourself, that you can’t get out of debt. And it’s not true that you can’t get out of debt. It’s just that you don’t have the skill yet to be able to plan how to make sure that you have money saved for the lifestyle you actually desire to live. What’s true is that you don’t have a plan. It’s not true that you can’t pay off debt and stay out of debt. So with safety funds, instead of just using your bonus to pay off your debt, your safety funds are going to help you actually establish like a timeline for paying off your debt. By establishing this timeline, it means that you’re not going to have to have the fear of getting back into debt. It means that you can actually establish like a debt payoff plan that actually feels comfortable, it feels motivating to you, it feels sustainable to you.
When it comes to doing something like paying down debt, I want you to have a level of sustainability, especially if you have debt that maybe a couple thousand dollars or maybe it’s five figures. I want you to know that you have a sustainable practice behind it. And by actually taking the time to look at what’s coming up in the next 90 days, you are learning one of the most invaluable skills of managing your money. And that’s called planning ahead. So I want you to pause before you take that. Like, okay, I’m going to get instant relief and I’m throwing all my money towards debt because that instant relief, you are immediately going to get your bubble popped when you have to swipe your credit card for something and you’ll be like, dang, I had just paid off my credit card and here I go again.
And so that’s just going to put you back into that debt cycle that you’ve experienced year after year after year. So before you take your next bonus and before you try to go and pay off your debt, I want you to first build your safety funds. What do you know is coming up in the next 90 days? Look at your calendar, look at your invoices, in your email and think about like, what do I need to make sure that I take care of? And then look at like, okay, how much money do I actually have left over that could go towards accelerating me, paying off my debt? But you all already know above all else, what I want you to have is a budget.
And the reason that I want you to have a budget is also it’s going to help you leverage the next time you have a bonus. And if you’re working with me, we get to go through this together. And you don’t have to think about like, okay, Keina you tell me do some safety funds? I don’t know what you’re even talking about but when we’re actually working together in my five month coaching partnership, we get to go through this concept, and we get to think about, okay, like how am I providing safety for myself? Financial safety is very important for you to feel like I have money available for the things that I desire to do. I have money available for the goals that I have set. And so I would rather you build safety funds than to pay off the high interest debt because the safety, the very name of the funds, they are going to put you in a position where you are going to to shift your mindset about actually wanting to manage your money and managing it well.
And it’s going to give you a win. It’s going to give you a win that you need and you’re going to feel good about yourself. And when you feel good about yourself, you want to keep going and making progress. So thank you so much for tuning in to this week’s episode. If this resonated with you, I invite you to share. And if you have not done so already, I would love to hear from you in the review section. So you can go and leave me a comment on Apple. I go through and I read them periodically. So I genuinely love to hear from you. And if you want to take this work deeper, apply to work with me, one-to-one, you can go to Wealthovernow.com. In the top, you can apply to work with me, or you can go to my show notes and click the link there and apply to work with me. So thank you so much. Until next week, have a great week.
Outro: Thank you so much for listening to Money Files. If you’re ready to take the next step to reach your financial goals, head to www.wealthovernow.com/appointment and let’s get started.
