Congratulations! If you’re reading this, you’ve probably either paid off your car, credit card or student loans; or, perhaps you’ve gotten a raise at work. All of these things are worth celebrating! But all of these things also raise one important question–what should I do with this extra income?
In short, keep putting it away. If you’ve been doing financially okay for the last however-many years, you shouldn’t need that extra income now–especially because it can easily go to waste on frivolous items. Splurging is, after all, effortless.
You should draw up a new budget now that your income has changed. This will allow you to lay out your options–to see where you can potentially put a few extra hundred-or-so dollars a month.
Save for emergencies
Having an emergency savings fund is the best financial move you can make. If you one day lose your job, total your car or have a medical emergency, this is the money that’s going to keep your head above water. DCCU’s Savings Builder account is a customizable account designed to help you succeed at reaching your savings goals.
Everyone’s emergency fund is going to be a different size, but it’s recommended that you have three-to six months’ worth of expenses in there. If you find yourself with extra income from a payment you no longer have to make, it can’t hurt to add a couple thousand dollars to your emergency savings.
No matter how old you are, saving for retirement is incredibly beneficial. Why’s that? Because retirement funds build on compound interest, which means–each month–you earn interest on your principal as well as on the previous financial period’s interest. Essentially, the more money you can put towards your retirement now, the more rapidly your savings will grow. If you don’t currently have a 401(k) or an IRA, this would be an ideal time to start one.
Pay off other debt
Doubling down on car payments after you’ve paid off your student loans (or vice versa) is a financially smart move that’s also satisfying in real time.
If you’ve got extra income all of a sudden, any of these avenues are smart places to send (not spend) your money. The most important thing to remember is that you should continue putting your income aside–whether that means paying down other loans or saving for the future.