Monster Income Changes Can Mess Up Your Quicken 2012 Budget - dummies

Monster Income Changes Can Mess Up Your Quicken 2012 Budget

By Stephen L. Nelson

If your income changes radically, planning a budget, even with the help of Quicken 2012, becomes really hard. The problems work both ways — if you’re income takes a giant leap upward or a giant leap downward, budgeting problems will occur.

Suppose that your income more than doubles. One day you’re cruising along making $70,000, and the next day you’re suddenly making $170,000. (Congratulations, by the way.)

You’ll find that $170,000 a year isn’t as much money as you may think. (By the way, this business about monster income changes is true no matter what your income level. Like, if you’re cruising along making $500,000 and see your income rocket to $1,000,000, everything still applies.)

Go ahead. Laugh. But for one thing — if your income doubles, your income taxes almost certainly more than quadruple.

One of the great myths about income taxes is that the rich don’t pay very much or that they pay the same percentage. But that’s not actually true. If you make $70,000 per year and you have an average family, you might pay about $2,000 in federal income taxes.

If you make $170,000 a year, though, you pay about $20,000 per year. So, if your salary slightly more than doubles from $70,000 to $170,000 (perhaps your spouse gets a really good job), your income taxes increase almost tenfold, going from $2,000 to $20,000.

Another thing is that you’ll find it hard to spend an extra $100,000 wisely when you’ve been making a lot less. And if you start making some big purchases, such as houses and cars and speedboats, you’ll not only burn through a great deal of cash, but you’ll also ratchet up your monthly living expenses.

Monster income changes that go the other way are even more difficult. If you’ve been making, say, $170,000 a year and then see your salary drop to a darn respectable $70,000, it’s going to hurt, too. And probably more than you think. That old living-expense ratcheting effect comes into play here. Presumably, if you’ve been making $170,000 a year, you’ve been spending it — or most of it.

But other reasons contribute — at least initially — to making a monster salary drop very difficult. You’ve probably chosen friends (nice people, such as the Joneses), clothing stores, and hobbies that are in line with your income.

Another thing about a monster salary drop is sort of subtle. You probably denominate your purchases in amounts related to your income. Make $70,000, and you think in terms of $10 purchases. But make $170,000 a year, and you think in terms of $20 purchases.

This observation all makes perfect sense. But if your income drops from $170,000 down to $70,000, you’ll probably still find yourself thinking of those old $20 purchases.

So what to do? If you experience a monster income change, redo your budget. And be particularly careful and thoughtful.