If you are in the enviable position of having extra money in your checking account or you would like to have a bit of extra money, what should you do with the extra? Maybe you’ve gotten a windfall and want to know the best way to use it.
Experts have some excellent suggestions that will turn your extra money into something more than lattes and the latest fashion AND give you the opportunity to splurge on your desires!
Step One -Find Extra Money
Your first step to having extra money is to see where your money is going. Write down or otherwise record where every penny goes for a month. Be honest! Then look at how much you bring in versus how much you are spending. Get rid of what you don’t need. Some experts recommend taking a second or third job for a short time. If you are already doing that to survive, cutting expenses are your best bet!
Occasionally refigure your spending and budget.
Step Two – Emergency Fund
Most Americans are one paycheck away from being broke. Experts recommend building up an emergency fund. There are some great banking options out there with low or no fees. Check out some of the online banking options. The interest rates can be far higher than a brick and mortar bank. The money is fairly easily available, but not immediately available.
Next, save up $1000 (especially if you’ve gotten some unexpected money). Once you are at that level, decide whether to keep saving until you have three to six months of living expenses or pay down your bills and free up more money!
Step Three – Short Term Goals
Set up a second saving account for short term goals. Some financial institutions allow you to have a Christmas or vacation account where you have to use the money by a certain date or place the money in a savings account and ask for the money to be frozen. You can have the freeze removed at any time, and have the frozen amount increased, but this prevents spree spending.
Step Four – Retirement
Hate to tell you this, by retirement will come faster than you expect. If your company offers a 401(k), take advantage of it. Match it if possible and invest more if at all feasible. If you’ve received a windfall, consider putting at least part of it into an IRA or similar account. Talk to an accountant or qualified professional.
Step Five – Pay Off Debt
Paying off debt can be a huge relief. Write down all your debts, the interest rates, the due dates, minimum payment amounts, and total due. Next decide which bills to pay down. One method is to start with the smallest debts and eliminate them. Then take the money that would have gone to those bills and pay down the next largest.
The other method is to pay down the debts with the highest interest rates. You can also use a combination of both – get rid of those pesky small debts and then go after the higher interest ones.
Step Six – Mad Money or Luxuries
In the old days, women were encouraged to carry “mad money” so they could get away from an obnoxious date. The term also means money to go mad with – spend of something you want but don’t need. Everyone deserves a luxury now and then. Put aside a bit of money to spend on non-essentials.
Budget your extra money, put a good portion of it in savings and retirement, and spend a bit on a small luxury. By making thoughtful and conscious decisions about your income, outflow, and windfalls, you can set yourself up for success. The most important thing is to know where you spend your money (budgeting) and to control expenses. The second is to have a plan for your money. We hope this gives you a good idea of what steps to take – the amounts or percentages are up to you and your unique situation.