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What to do when your business revenue is going up or you finally get that promotion you’ve been angling for?  Most people will use that newfound money to go on a nice trip or take the family out to dinner.  Others will stick the extra money into a savings account or pay off some outstanding debts they may have.  And there are those who will use that new high income to inflate their lifestyle (appropriately called lifestyle inflation) by buying houses which are bigger than they can afford or cars that are just a step above their pay grade.

Ask any financial expert about lifestyle inflation and they will tell you where you can stick your inflated lifestyle.  It is generally looked down upon in the financial community (including my own little community here).  If you tell me you just got a 10% raise, I will most likely ask you to increase your debt payments by 10%, increase your investment contributions by 10%, or some combination of the two.  This is usually awesome financial advice that will get you a lot closer to financial freedom.

But financial advice is usually not so black and white (or shouldn’t be anyway).  This got me thinking, what are some things to spend new money on that can bring value to your life beyond  paying off your debts and investing your money?  Here is a list of things I thought of:

–Vacation:  As I mentioned before many people will use a raise as an excuse to go on a vacation.  I’m actually fine with that as long as it doesn’t become an excuse to go on an expensive vacation year after year.  We need a little break now and then, and a one time vacation splurge can help us recharge and refocus.

–House Cleaning:  Okay, just hear me out.  Maid service is usually the first thing to hit the chopping block when expenses are being cut, but there can be some value in it for some.  It’s all about opportunity cost and peace of mind.  Most people love coming home to a clean house.  If things are dirty or out of place, it can be a distraction.  But if outsourcing that job to a cleaning service will provide peace of mind AND give you time to do something of personal value, then I think it can be justified.

–Improve your skills:  Skills can be improved to increase money and/or time.  Taking some classes to improve your skills could be well worth it in terms of return on investment.

–Network:  Conferences can be expensive, but they can be extremely motivating and lucrative.  They usually have great speakers and influential leaders in attendance, so there are lots of opportunities to get ahead.  But it’s important to get the most out of a conference and not be the guy sitting by himself all weekend eating from the buffet every chance he gets.  The Muse wrote a great article on things to remember when attending a conference.

On a personal note, one short conversation I had at a conference allowed me to get a promotion at work.  I had expressed some interest in the position and provided some ideas.  A few months later the position unexpectedly opened up, and my name was the first one on the list as a potential replacement.  All because of one little conversation.  So use your time at conferences and networking events as efficiently as you can.

–Gym membership:  When January 1st rolls around, gym parking lots are full and and clubs are filled with lots of people lifting things and running in place.  After a couple of months, most of those new people aren’t there anymore.  If you’re one of those people that signs up for a gym and doesn’t show up, don’t bother spending money on a membership.  But if you are self motivated enough to incorporate a cardio or weight training program into your life, a gym membership can be a good value.  Monthly prices vary, but most good gyms have rates around $40-50/month, which can be valuable if going to the gym is helpful to your health and sanity.

I typically wouldn’t recommend doing anything other than investing or debt payoff with any type of raise.  But there is no one size fits all rule, and if you can create time or money by spending your raise on one of these things, then that may be the best use of your extra money.

What are some things you spend money on that bring extra value to your life?

I remember that great feeling I got when I received my first paycheck deposit as an optometrist.  It was more money than I had ever seen in my checking account at one time.  It was very cool to see such a big number, but then thoughts started creeping into my head:

“What if someone steals my ATM card and withdraws all of my money so they can make it rain?”

“What if my bank makes an error and loses all of my money?”

“What if I can’t remember my password?”

While most of these concerns came from the paranoid part of my brain, they all had the same thing in mind:  having all of your money in one place is really dangerous.  Not only is it risky walking around with thousands of dollars in your wallet, but leaving all of your money in one place is not going to allow you to reach your financial goals.  Let me explain.

We all have grand goals for ourselves.  Have a nice and comfortable retirement.  Being able to pay for our kids college.  Taking a nice and long European vacation.  All of these things are nice, but we still have to eat and be ready for emergencies that come our way.  This means our money needs to be in diverse places depending on when we need it.  All of our proverbial eggs should not be in one proverbial basket.

Here is a list I came up with of possible places to put your money depending on what you need that money for:

Short term money

This includes money needed for day to day expenses like food, clothing, debt payments, insurance and any emergencies:

–Checking account:  This is the central hub of your finances, so make sure you have a good one that doesn’t hit you with any fees.  Your checking account should have enough money to pay any immediate bills and day to day expenses.  Checking accounts usually get minimal interest, but that’s okay since the main use of your checking account will be to serve as a control center to move your money to where it needs to go.

-Savings account:  This should be the place to park money for any emergencies or any goals that are a few months away.  Online savings accounts usually earn a little more interest than checking, which is nice, but the main benefit is that they are liquid and will allow you to withdraw money in a pinch.

-Health Savings Account (HSA):  An HSA will allow you to set aside some tax free money for healthcare expenses.  The emergency visit to the doctor or pharmacy will happen at some point, so it’s nice to have some tax free money to be able to use for those expenses.

-Roth IRA:  IRA literally stands for Individual Retirement Account, but a Roth IRA can be used as a last ditch emergency fund if needed.  Contributions to a Roth are made after taxes, which means that it is your money and you can withdraw it at any time penalty free.  I would recommend you don’t withdraw it unless needed, because earnings grow tax free, but it’s nice to know that you can tap it if you need to.

Medium term money

This money is for goals that are not that far away, but not exacctly around the corner either.  This could be for a house down payment or saving for a car or vacation.  You want this money to be liquid, but also be able to get some sort of return on it:

-Savings account:  While most good online savings accounts have interest rates around 1%, they have the advantages of liquidity and security.  You can usually withdraw from them at anytime and most online savings accounts are FDIC insured, meaning you are guaranteed to get your money back even if your bank goes out of business.

-HSA:  Many HSA’s have investment options, so investing in a “safe” portfolio of bond funds will give you a better return than just letting it sit in a cash account.  While there is not a 100% chance you will get your money back, keeping your investments conservative will give you the best chance that you won’t lose most of it.

Taxable investment account:  The company Betterment is a great example of how you can use an investment account to save for medium term goals.  With Betterment, you can let them know when you plan on using the money, and it will automatically adjust your portfolio.  If you need the money fairly soon, a conservative portfolio is chosen.  If you are saving for retirement, a more aggressive portfolio is picked.  You can do this yourself in any taxable investment account, but there is always the risk of losing money so always keep that in mind.

Long term money

This is mainly for retirement contributions.  Here are the best accounts for that:

-401(k):  Many employers provide the opportunity for employees to contribute to a 401(k) account, which takes out money before taxes and deposits it in a portfolio of mutual funds that you choose from a list.  Some employers also provide matching funds, making additional contributions on your behalf.  Conventional wisdom says to contribute enough to at least get the match, and then contribute as much as you can if you have a good plan with low fees.  You can use a website like Personal Capital or FeeX to see how the fees in your plan stack up.

If retirement is many decades away, you generally want to invest more in stocks than bonds, as this will provide the best potential for good returns.  As retirement gets closer, shifting into bonds is the smart thing to do as this will protect most of your money in the case of a stock market crash while providing a decent return.  Funds in a 401(k) cannot generally be taken out penalty free until age 59.5, so it forces you to use this money for the long term.

-Traditional IRA:  Anyone who is not offered a 401(k) can contribute to a Traditional IRA.  You still get to deposit your money tax free, but you can set the IRA up with any company you choose, providing much more flexibility than a 401(k) plan.  Similarly, penalties apply if you try to withdraw too early.

-HSA:  The HSA rears its beautiful head once again.  Before age 65, money in an HSA that is not used for healthcare purposes will be taxed and you will have to pay a penalty.  After age 65, you can use HSA money for anything, penalty free.  So it kind of turns into a Traditional IRA after the age of 65.  Since many HSA plans offer investment options, setting aside a portion of your HSA money for long term investment can be a good idea.

I like thinking about money as employees of a company.  Each dollar needs a job and needs to be put in the best position to do their job.  Putting your money in the appropriate place depending on when you’ll need it is the key to having a well oiled and diversified financial machine.  And in case you haven’t gotten the message, open an HSA if at all possible.

Can you smell it in the air?  The sounds of tax software commercials wherever you turn, citizens squealing in delight at getting their tax refunds and other citizens pulling their hair out because they owe the government money.  It’s tax time!  The time where you will be inundated with commercials, articles and people on the corner flipping signs that say you’ll get a free pair of headphones for doing your taxes with them.

They all talk about maximizing your refund and getting the money into your checking account FAST!  While this is all well and good, other than topping off some retirement accounts and fiddling around with your investments, there’s not really much we can do about our 2014 taxes.  If your taxes are done correctly, you’re going to get the same refund if you go with the latest tax software or your friendly Walmart parking lot tax preparer. The only thing you can really do is get all your tax papers organized and try not to pay too much for a preparer.  That’s it.  There’s a lot of hoopla this time of year about tax tips, but 2014 is gone and there is not a whole lot you can do.

There should be more hoopla about saving on your 2015 taxes.  Paying less taxes is all about being smart about them every month of the year starting in January.  In essence, it boils down to one of two things.  Whether you own a business or are a high schooler working a part time job, there are only ways to pay less taxes:

• Decrease gross income
• Increase deductions or credits

That’s it.  These are the only two ways.  The whole crazy US tax code stems from these two things.  Even people who cheat on their taxes do one of these two things, just illegally.  It’s important to know this so you can practice working on these throughout the year in order to decrease your tax burden.

Decrease gross income

When someone says they make $100,000 a year, they don’t simply calculate their taxes based on that number.  It’s based on “taxable income”, which is essentially what you made from all sources minus your deductions.  This number is what you want to get as low as possible and one method is to decrease your gross income.

There are also certain credits and deductions that you can only get if you have a low enough income, so not only will decreasing your gross income decrease your overall taxable income, it can open the door to more credits and deductions.  For example, for a married couple filing joint taxes, the child tax credit starts phasing out for couples whose adjusted gross income is above $110,000.  By keeping your income lower, you can get the full benefit of the credit.  Obviously, consult a tax professional for your specific situation.

Here are some easy ways to decrease your gross income:

Contribute more to your 401k.    This would be my first option, as it has the effect of decreasing your gross income and helping ensure your retirement.  If your company matches some contributions, even better.  Contributing to a 401k seems daunting for some people, but there are only a few decisions you have to make.  The bottom line is that contributing to your 401k is a surefire and powerful way of decreasing your taxable income.

Contribute to a Traditional IRA.  A Traditional IRA works similar to a 401k in that eligible contributions can be deducted from your gross income.  There are income limits, however.  For 2015, a single filer must have an adjusted gross income below $61,000 to be eligible for the full contribution deduction, which is $5,500 for those under 50 years of age.  Some people prefer a Traditional IRA to a 401k because you can choose to open it with any company and are not limited to the choices only your employer gives you.  If you meet the income requirements, this can be another powerful way to reduce your gross income.

Contribute to a Health Savings Account.  Yet another great way to decrease your gross income and help your future at the same time is to contribute to an HSA.  HSA’s are available to those who have a High Deductible Health Plan, and allow you to contribute money pre-tax for health related expenses.  This money also has the bonus of not being taxed upon withdrawal if used for health care expenses, which is an amazing benefit.  Money contributed to an HSA also avoids FICA taxes, which are the Social Security and Medicare taxes.  I don’t think you can find an account anywhere that allows you to escape taxes totally.

Many HSA providers also have investment options, which is great since any gains or qualified withdrawals are not taxed.  In order to provide an incentive to contribute to an HSA, some employers will throw in some free money as well.  Definitely worth checking out if you haven’t already started contributing.

Contribute to a 529 plan.  Many states allow a state tax deduction for contributions to their college savings plans.  Find out if your state is one of them, and get a little break on your state taxes while helping with your child’s future college expenses.  Read about my thoughts on 529 plans here.

Work less.  Not the ideal solution for most, but if you worked really hard last year and it caused lots of unnecessary stress, it may be an option.  Also, if you have a really long commute and have high workday related expenses, it may not be the worst thing in the world to take a day off here or there.

Increase deductions and credits

Deductions and credits are the other way to decrease your taxable income.  Deductions work to reduce your taxable income while credits reduce the actual amount of tax you owe after it is calculated.  Thus, credits are definitely more valuable but can be tougher to qualify for.  You don’t think the government would make this easy now do you?

While the list of deductions and credit available is huge, I’ll just mention a few of the easy ones that most people can get.  As always, consult a tax professional for your specific situation:

Have a kid.  The Child Tax Credit can be great, especially for those with lots of kids.  For those who meet the income requirements, it can reduce your tax bill by $1,000 per child.  While having a child just to get a tax break is generally not a good idea, it’s a nice little break nonetheless.

Go back to school.  There are a number of different credits and deductions for education.  The big ones are the Lifetime Learning Credit, the American Opportunity Tax Credit and the Tuition and Fees deduction.  They all have different requirements and effects on your taxes, so it’s best to have a tax professional guide you on which one you can claim.  Lots of people want to go back to school to get another degree or need some help for paying their child’s tuition, and these education credits and deductions provide just that.

Give to charity.  If you are able to itemize your deductions, which means you can claim certain deductions which will exceed the amount of the standard deduction that everyone is eligible for, then increasing your charitable contributions is an option.  I know, I know we should give to charity out of the goodness of our hearts, but if we get a tax break for it too, then why not?

A strategy that some people do is that if they know they won’t be able to itemize deductions next year for whatever reason, they will double their charitable contributions for the current year, essentially giving their next year’s contribution as well which can maximize their deduction.  It’s also a good practice to donate any unused clothes at some point in the year so you can take advantage of the deduction while de-cluttering your home.

Business expenses.  Owning a business or having a profitable side hustle can lead to a plethora of possible deductions, which I can’t possibly go into because there are so many deductions available and I don’t know too much about them.  This is definitely something to talk about with a tax professional.

The time to get serious about taxes is the year before they are due, not when you have to file them.  Unfortunately by then, the ship has already sailed as far as getting deductions and credits.  The deductions and credits listed in this post are kind of the easy low hanging fruits, but any serious discussion about your specific situation should be made with a tax professional.

Most people watch movies to pass time or just let off some steam.  When I watch a movie, I make it worth my while.  I like thinking about the characters and their relationships, and what values or morals the movie was trying to get across.  For all the talk of Hollywood being a soulless money making machine, which it essentially is, most movies do have a beneficial lesson or two in them.  You just have to look for them.

I recently watched The Wolf of Wall Street (I know I’m like a year late to the game).  And being a personal finance blogger, this movie REALLY resonated with me.  It takes place in the 80’s and is about a man named Jordan Belfort.  Mr. Belfort (who ironically is currently a motivational speaker) is a Wall Street broker.  Which means he manages investments for people and gets a cut via commissions.  He got an entry level job with a firm and was idealistic to the core.  He just wanted to help people make money, and make a little bit himself in the process.

As the story usually goes, he let the money get to his head.  He eventually founded his own brokerage firm, which was doing some very shady stuff.  They were essentially cheating people out of their money and getting fat on commissions.  The FBI finally caught wind of this and he got some jail time, though not nearly enough in my opinion.  The movie pretty much chronicles his career.  It’s a very entertaining movie, but be warned it’s pretty vulgar so make sure there are no kids in a 50 foot radius.

But this post is not just a movie review.  It also contains some financial lessons I picked up from watching:

1.  There are some bad SOB’s out there trying to take your money.  Mr Belfort and his cronies had one goal and one goal only:  make lots of money.  And they would do it by any means necessary.  This included super high pressure sales tactics, misleading investors and lying to the SEC.  The biggest thing I noticed from their methods is that they wanted to make the investor feel that this one investment decision is the most important one of their life.  That if they don’t agree to investing with them, they will regret it for years.  Because they seemed like a very legit and professional company, many investors complied.

Lesson learned:  Never work with someone who wants you to make a decision right away.  Any major life or investment decision takes time and thinking.  If the salesperson wants you to make a decision on the spot, take your business elsewhere.

2.  There are a lot of gullible people out there.  As the saying goes, there is a sucker born every minute.  I’m not sure who said it, but it was probably Albert Einstein or Ben Franklin.  Mr. Belfort and friends defrauded a LOT of people out of their money with their antics.  I was actually surprised that so many people were willing to invest so much money on a whim.  It shows that as long as you have a good pitch, you can get a lot of people to buy your product.

Lesson learned:  Marketing is key.  If you can effectively (and honestly) market yourself and are diligent about it, you should be able to get what you want (money, clicks, ratings etc.) eventually.

3.  No one knows what the market is going to do.  There’s a scene early in the movie where Jordan is having lunch with his first boss (played hilariously by an old looking Matthew McConaughey).  The boss tells Jordan that no one knows if the market is going to go up or down, that it’s a losers game to time the market.  But as long as you make the investor think that it’s going up, and as long as you make them rich on paper, they will keep investing and the brokers will keep getting rich off of commissions.

Lesson learned:  Don’t try to time the market.  Stick with index funds that have low expense ratios, keeping more money in your pocket and out of the broker’s. 

4.  Technology is awesome.  Since the events of the movie took place in the 80’s, most of the transactions were done over the phone.  This made it easy for the brokers to employ their high pressure tactics and make the investor seem like they had no other choice.  Online trading wasn’t really an option back then so investors were at the mercy of the broker.  It was also harder to get the latest business news so when the broker is telling you something big happened, you had to believe him.

Lesson learned:  Do your research online.  It’s easier than ever to find which funds are the cheapest and what is the right asset allocation for you.  Online transactions are cheaper than phone transactions as well.

5.  There is never enough money.  The main characters of this show totally gave themselves over to money.  It was all they thought about day and night.  This eventually landed them in lives of debauchery fueled by booze and sex, day after day.  No matter how big their houses got, how fancy they traveled or how lavish their parties, they just wanted more and more.  Until the FBI got them.

I sometimes believe I think about money too much,  but then I realize that I want to make money to keep my family secure and help those in greater need than myself.  I wouldn’t say I’m the most noble person out there, but there’s a difference between wanting money for the sake of wanting it and wanting money for higher purposes.

Lesson learned:  Money is not an end, but a means.  It’s up to you to decide what ideal end is.