The Dangers of Earning More Money

If you are starting to earn a little money from a side gig or are thinking about starting a side gig, you want to make sure you aren’t falling into this trap. Earning a little extra money hardly sounds like it is a bad thing. Who couldn’t use a little extra money in their pocket?

We all know that the current economy is struggling and earning a little extra money may be just what you need. However, when you start to bring in that extra money, make sure that you don’t make the same mistake that I made.

How Earning More Money Was a Problem For Me

A while back I started earning money from this blog. I started it as a hobby, but before I knew it, it was earning some decent money. When I realized that I was starting to make a little extra money, I began to wonder what I would do with it. I truly considered this to be extra income and as a result, I didn’t even include the income from my blog in my monthly budget.

Since my wife and I are already breaking even each month, this meant that I had extra money to spend however I wanted. The ideas started to race through my mind. Since this was extra money, I felt no obligation to put it towards any of my financial goals. As a result, I found myself more willing to splurge on unnecessary items.

I would be walking through the grocery store and see something I wanted. I would say to myself, “I am earning a few extra bucks from my blog, so I can afford to splurge a little.” Later, as my wife and I were sharing our only laptop, I found myself wanting to buy an IPAD so that we could both online at the same time. I kept thinking that I am earning a little extra money, so it really doesn’t matter if I spend a few extra dollars here and there.

Why Earning More Money Can Be a Disaster

Before I knew it, I found myself wanting to spend thousands of extra dollars in a given month even though I was only earning a few hundred from my blog. This is a problem!

Rationalizing any extra spending is never a good thing.

If you find yourself justifying an unnecessary purchase, this may be the first sign that you are spending more than you should.

Ironically enough, earning more money made me more likely to spend more money than I was making.

You should never spend more than you make in any given month. This is one of the most fundamental aspects of proper budgeting. If you are earning extra money, be careful not to commit that amount several times. This can be prevented by keeping track of your income and spending down to the penny. Not tracking it is a common mistake in budgeting.

Avoid Your Next Financial Disaster

Tracking your money coming in and out is a great way to prevent yourself from assigning the same extra income to multiple different expenses. In other words, avoid saying that you will use the extra money for this or that. If you do that, you encourage splurge spending. It is also easy to commit the same extra dollar income to several dollars in expenses. Before you know it, you have earned a hundred dollars and are spending a thousand.

The best way to avoid financial difficulties as you make more money is to keep your lifestyle the same. Don’t let increases in income push you into financial trouble. Continue to live modestly and you will have no trouble.

Better yet, commit that money to some other use. Since making this mistake, I’ve started putting all extra money towards investments. This is how I am easily able to max out my Roth IRA among other things.

Have you ever been tempted to spend extra income? What was it that you wanted to spend your money on?

38 Responses to The Dangers of Earning More Money

  1. Penny says:

    Wow, I can see how that could happen really easily. I think I’ve “earned” a total of $0.45 so far at my blog, but if I ever start seeing money coming in there I guess I’ll have to sit down and figure out a game plan for it. My instinct right now would be to pull any expenses for the blog out first, and if there was money left over put it into my vacation savings. Sounds like I should probably figure that out before I start earning money.

  2. PKamp3 says:

    Yeah, it can be dangerous – people do have a tendency to save whatever they were saving before, and inflate their lifestyle to ‘fit’ their new salary/income.

    Let me say, however, that’s a problem most people don’t mind having, haha.

  3. Nothing wrong with splurging on yourself with some of that extra money. Just keep your savings as a percent of your income and it should never be a problem.

  4. I plan on using extra money primarily for debt repayments so I hope not to fall into the same trap that you mention.

  5. AverageJoe says:

    Great post! I heard some Robert Kiyosaki and the dangers of “the rat race” in your comments. Avoiding that like the plague is a great strategy.

  6. Jonathan says:

    Very good advice. It’s pretty awesome how you have built up this blog so quickly. Looking forward to November’s income update.

  7. 101 Centavos says:

    I’ve used some blog income to buy a bit of junk silver. Turned electronic money into physical assets.

    Other than that, it just sits in the Paypal account, waiting to be deployed. On second thought, I might just use some of it for services like blog carnival submission. :-)

  8. Really important point for bloggers to think of . Since it’s a new experience, wait til you have a year or two of consistency and make a plan for how you want to allocate it. Congrats!

  9. YFS says:

    With the “extra” money you have to treat it one of 2 ways. Either count all your money within your monthly budget or don’t count it at all. You should always operate with the money with your budget. Great job on earning more money.

  10. Don says:

    I differ in that I used my money to invest in a dividend stock that now provided enough of a payment to cover my expenses for my primary blog. While it seemed smart at the time, I might want to spend that money to move a bit faster in the online world…

    • Corey says:

      That’s a tempting approach. I agree with you though, it seems that online investments can give a significantly faster return.

  11. I try not to do “mental accounting” on extra money – rationally, we should treat every dollar the same because money is fungible, but of course that’s easier said than done. What I do is to put 25% of my freelance income into an ING fund earmarked for SEP IRA, and then another 25% into another ING fund for taxes. Then I figured even if I spend the rest, I’ve at least saved SOME of the money.

  12. I so wish I had learned about all these money lessons way back when as I have definitely gone down this path before. Though they were still money well money as I had a great time traveling and treating the ones I love (but wished I saved a percentage of each raise). Better late than never I guess. If I begin to earn money from blogging, it’s all going to be invested for dividends.

  13. I’ve found one of the dangers with the extra blogging income is that it’s so variable month to month. If I have one month with $3K and invest a little, spend a little and then do a new home project, if the next month is $1K, while that’s nothing to sneeze at, that’s a huge swing! I’d be the first to admit that with the extra income, while I am putting a lot toward retirement and 529 plans, our lifestyle inflation has increased a bit. If it went away tomorrow, we’d definitely have to adjust – and I don’t know that we’re ready to do that on a dime.

    • Corey says:

      Yes, I am trying desperately to avoid the lifestyle inflation. Especially with my wife getting a promotion at the same time. I plan to use my first 5k from blogging each year towards maxing out my Roth…. but that sounds like a great post idea, so more to come later. ;)

  14. I haven’t used any blog income for anything else but to run the blog. In fact I have a large sum sitting in paypal right now. If anything I may use it for some investments this year that will go towards retirement.

    • Corey says:

      Yes, it sounds like more and more people are just letting the money sit in paypal. While I agree that there are benefits to keeping some in, it’s probably unnecessary to keep so much in there. Have you considered investing in another blog or online business?

  15. Shawanda says:

    Yeah. Spending thousands more than you normally would while making only hundreds more than you normally do is definitely dangerous. This year has been a good year for me as it relates to income. In 2011, I’ve spent well over $6,000 on travel and vacations. Since I was still able to save a large chunk of my income, I don’t feel guilty about it at all. I enjoyed every trip I took. I don’t believe in saving just for savings sake.

    • Corey says:

      I love that idea! My wife and I love to travel and saving enough money so you don’t feel bad about your nice vacations is a fantastic way to be discipline and still enjoy life.

  16. [...] The Dangers of Earning More Money by Corey on 20′s Finance Wise warning of how easy it can be to turn earning more into spending more. A must read to help keep focused on your financial goals. [...]

  17. Evan says:

    It isn’t the danger of earning more money as it is relying on mental math…

  18. [...] 20′s Finances has a problem that most of us wouldn’t mind having… earning money from something new! [...]

  19. [...] not give it a shot. I knew one thing for sure – I didn’t want to spend our hard-earned extra income on groceries.We planned out what we were going to eat for the next 6 days, like any other week, and [...]

  20. Sam says:

    I did some rough calculations and have spent less than 1% of my blog income over the past 2.5 years on myself. It’s either been donated or just sits in the company balance sheet.

    Not sure why I have no urge to splurge. That’s what my day job paycheck is for?

    Sam

    • Corey says:

      I hope it’s in a high-interest savings acct at least? If not, invested or something. Good for you. I was telling Derek that blogging income kind of seems like monopoly money. It sits in a separate acct and it just comes in so easily… It’s hard to realize that it’s really there.

  21. Lifestyle inflation strikes again. :)

  22. I don’t make a lot of money online. But the money I did make last year, I ended up spending it. This year, I’m leaving all the extra money untouched. Maybe at the end of the year after paying taxes, I’ll have a good fund established to do something fun.

  23. […] The Dangers of Earning More Money — Earning more money may make you feel the need to spend more money. [20's Finances] […]

  24. Chris says:

    As a financial advisor for over 8 years I’ve seen this type of thing happen over and over again. Clients would get a windfall, raise or bonus and decide to go bananas! I’m all for spending a bit of the extra money to reward yourself for putting in the work to get the extra income. But paying yourself first and keeping a close eye on your budget is the name of the game! Thanks for touching on a topic that doesn’t get mentioned too often!

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