Extra money comes in many forms. Perhaps you earned a raise or bonus at work, reduced your expenses, received a financial gift, or inherited an unexpected sum. Or maybe you decided to earn extra money driving an Uber or Lyft or picking up jobs on websites like Taskrabbit. Regardless of how you found yourself in a position where you have some extra cash, it is important that you know how to use those funds in a productive way.
By having a plan in place, you can optimize the financial impact of your extra cash and more importantly, know how to avoid the common mistake of squandering it on an unnecessary purchase.
While heavy spenders struggle to hold onto extra money, frugal types get confused when they suddenly have unexpected funds. Luckily, there are some useful ways you can make your extra money count. Below, we’re going to look at six useful ways you can save and invest your extra money.
1. Focus On Paying Down High Interest Debt
Whether you find yourself with an extra $100 or $10,000, if you are carrying any high-interest debt, you should focus on paying it down.
Credit card interest rates can range between 13 and 30 percent. If you are just meeting the minimum payments on your credit cards, you are likely paying a tremendous amount in interest. Do not feel ashamed or overwhelmed if you carry heavy credit card debt; instead, take action and begin paying down those debts. You will thank yourself in the future.
The same can be said about expensive student loans. Most carry high interest rates and some are even variable. This means that you are throwing a substantial amount of money into a hole each time you make a payment.
Understanding interest rates can be tricky. For example, if you were carrying roughly $6,000 in credit card debt at an interest rate of about 16 percent, even paying $100 a month could leave you paying for nearly 10 years. Worst of all, you would end up paying over $6,000 in interest – bringing the total you’ll pay to double your original balance!
The sooner you pay off these high-interest debts, the sooner you can reach your other financial goals. Rather than spend extra money on a shiny, new item, you should be striving towards becoming debt-free.
2. Build Up An Emergency Fund
While it may not be the most exciting way to use extra money, preparing for the worst is never a bad move. A common motto in the financial world is “hope for the best, save for the worst”.
Life is full of surprises; sometimes those surprises take the form of unwelcome financial challenges. If you were to lose your job, suffer a medical emergency, or need to replace an expensive item, such as a car or household appliance, would you be ready?
Most financial experts suggest you set aside at least a three-month savings cushion. Preferably, this amount would be increased to cover six to nine months of lost wages. If you were to suddenly lose your job or otherwise be unable to earn a living, an emergency fund containing six months would allow you to ride out the storm.
The last thing you want when the unexpected strikes is to lose the roof over your head. Far too many people live outside of their means and would not be able to maintain their standard of living without a paycheck. If you have some extra money, consider making contributions to an emergency fund.
3. Make Wise Investments
Depending on your current financial situation, you might already be looking at investing. Building an investment portfolio does not have to be an overwhelming and risky task.
There are plenty of professionals that would be willing to talk you through the basics of investing. There is also plenty of useful information available to you online. Not only that, but there are also investment apps that allow you to keep an eye on how your investments perform.
Investing has never been easier. Once you get into the habit of investing your money, you quickly discover how addictive it can be. Seeing your money work for you is really liberating. Just make sure that you are not investing money you cannot afford to do without. Start with your extra money and if you find you can afford to invest more, you should do so.
4. Pick A Goal And Save For It
Do not be afraid to put your extra money aside and save for a particular goal. You can easily open a savings account and use your extra money as your first contribution.
Consider choosing a particular goal. Not only will it make saving more fun but it will also encourage you to save more.
5. Contribute To A Retirement Fund
Take a look at the retirement accounts that are available to you. Planning for your future, no matter how close or distant, is never a mistake. There are plenty of accounts designed specifically for holding retirement funds, like IRAs. Not only do these accounts generate high rates of interest, but they are also often untaxed until you make a withdrawal.
Make sure you look into employer-sponsored plans, such as a 401(k). Having extra money could be the kick-start your retirement plan needs.
6. Consider Making A Charitable Donation
If you find yourself with extra money, you can always consider giving a portion of it to a charitable cause. Giving back to your community has a number of benefits.
Firstly, it makes you feel better. Knowing you have done some good with your extra money can give you a nice morale boost. Giving to the less fortunate puts your own financial situation into perspective and motivates you to stop spending money on trivial things.
There are also practical financial reasons to donate to charity. There are numerous tax benefits related to charitable donations. If you plan to donate a large sum, consider consulting a qualified tax advisor about the implications of your donation. It could be used to reduce your taxable income.
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