Getting Ahead Financially With the Found Money Commitment
6 second take: Knowing what to do with found money can make a significant difference in your financial status.
Financial advisors use many techniques to assist their clients in making decisions that will help show them how to get ahead in life financially. One of these techniques is the found money commitment, sometimes expressed as the found money concept.
The found money commitment is a decision to allocate any newly found money toward helping you achieve your financial goals. This money could come from realizing savings in things you are doing now, from savings in taxes or any other cost savings you might undertake.
The found money commitment works because it is a premade decision. You commit to allocating your newly freed up resources toward your long-term goals. You don’t have to make the decision each time you free up resources. Little changes are also less likely to fall through the cracks if you have committed yourself to using them for your goals.
You can implement the found money commitment yourself without a financial advisor or coach.
The commitment to use found resources toward financial goals does not need to be an all or nothing thing. The key to the effectiveness of how you get ahead in life financially is that the decision is premade. Obviously, a higher level of commitment toward goals will help you achieve them faster, but any commitment is better than none.
The two most common forms of commitment are a 100 percent commitment, in which all found money is allocated toward long-term goals, and a 50 percent commitment, in which half the found money is allocated toward long-term goals and half is spent on current needs or wants.
The 100 percent commitment is the more common of the two. You could use another number, such as a 75 percent commitment. If you are not on track for your long-term goals, you should consider the highest level of commitment you can convince yourself to make.
In either case, there may be pre established exceptions. Most notably, raises or merit increases are typically dealt with differently — with a different pre-made decision.
Debts and taxes are two of the most common areas where you can find money to allocate toward your goals.
In some cases, you may pay off debt, freeing up those resources. For example, say you have had a credit card that you have been slowly paying down by putting $100 per month against the balance and not making any new charges on the card. When that debt is paid off, there is $100 that can be allocated elsewhere in your budget.
In the absence of a premade decision, the money will often be absorbed into the budget with nothing to show.
If you have made a commitment to direct found money toward your long-term goals, you can increase your contributions to one of your goal funding accounts by $100 per month and still have the same amount of money to live on as you had before. No sacrifice, but getting closer to achieving your goals.
You may also free up funds allocated to debt by consolidating or refinancing. This can be a great strategy if there was a one-time situation that caused the debt, such as the loss of a job or an uninsured medical issue.
If the debt accrued simply because you failed to live within your means, consolidation can still help — if done in conjunction with improved spending discipline to prevent the re-accumulation of debt.
Many people over-withhold their federal income taxes. They effectively give Uncle Sam a no interest loan of their money, which isn’t exactly how to get ahead in life financially. Adjusting your withholding and increasing your systematic contributions toward your goals is a great way to get ahead financially without any meaningful change to your budget.
Another way to learn how to get ahead in life financially is by reducing your recurring expenses. Recurring expenses are another potential source to free up some funds. Many people have not reviewed their auto or homeowner’s policies in quite some time. Their coverages are frequently not in line with their current needs.
You may be able to reduce premium expenses by shopping carriers. It is important to maintain appropriate levels of coverage for your situation, but not all insurance companies charge the same and there could be opportunity through shopping around.
Life and disability insurance can also offer opportunity, but this is less common. Life rates are based on age; permanent policies should rarely be exchanged. Term insurance may be shopped for savings in some situations. Most people are underinsured for disability and won’t find an opportunity there, although there are exceptions.
With insurance, it is important to first make sure you have appropriate coverage before trying to lower premium expenses.
Subscriptions also can be a place to find some resources to allocate toward your goals. Many people are paying for subscriptions they rarely use and wouldn’t miss. Some are paying for subscriptions they don’t know they have and never use.
Balancing your checking account and making sure you account for all expenses on credit cards can be an eye-opener — and perhaps free up some money for your goals.
Living expenses may offer another opportunity to free up resources. This, however, is not usually the same as finding money; it frequently involves a change in either behavior or lifestyle.
If you were to believe the masses of new financial bloggers, you could be convinced that the shortest path to financial freedom is to not buy a daily $7 latte. Unfortunately, many people never bought a $7 latte in their lives and — surprisingly — are not millionaires.
In all seriousness, sometimes reducing expenses — even latte expenses — is appropriate. People should live within their means, especially if they want to achieve long-term financial goals.
Wage increases should generally be treated differently than other found money. Wage increases, in part, fund your increased costs due to inflation. Things get more expensive over time; an increase in wages should cover that, most of the time.
Though periodic increases in wages generally cover or outpace inflation, they are also a good opportunity to increase contributions toward long-term goals. One way to do this, but still leave some increase in the budget for higher expenses, is to allocate only a portion of a pay increase toward your goals.
Many people will take an increase from a regular annual review and increase their retirement plan contributions by a percent of their salary, when they are next able to. Sometimes you may have to wait to make an increase.
If you have maxed out your retirement plans through work, you might allocate those contributions elsewhere, depending on your needs to achieve your goals.
Increases due to job changes or promotions should also be treated differently.
There is a tendency to use all of the increase for an improved lifestyle. A found money commitment can help keep that in check, perhaps using half of such an increase to improve lifestyle and half to help achieve goals.
One thing to remember is that improving your lifestyle impacts future needs; if you improve your lifestyle now, you probably won’t want to give that up at retirement.
A found money commitment is a commitment we make to ourselves, which can help show us how to get ahead in life financially. Premade decisions work by reducing the pull to do other things with the money. It helps with behavior; people are more likely to follow through on a premade decision.
Having to decide what to do with the money every time — or never even thinking about what to do with it — probably won’t help you to get ahead.
It’s a simple thing. The technique is used by many financial advisors because it works. You can reap those benefits whether or not you work with an advisor. The commitment you make is to your future self. They’ll probably thank you when you meet them.