If you are fortunate enough to have some extra money, then you might be thinking about what to do with extra cash.
There are so many options now.
Do you save it?
Do you spend it?
And, what about investments?
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In today’s post, I’ll cover the absolute best things you can do with that extra cash to help take your finances to a whole another level. It can help you buy your dream home, retire a few years earlier than you originally thought possible, or each other bigger and more important financial goals.
No matter what your goals are, if you’ve got free money sitting around, whether it’s $500, $5000 or $50,000, there are far better things you can do than putting it in your savings or checking account or under your mattress!
Smart Ways to Use Extra Cash
Here’s what to do with extra money…
1. Build an emergency fund
You never know what’s around the corner just looking to eat up cash – your car could breakdown or your pet could need an expensive surgery. That’s why it’s a good idea to build an emergency fund.
Experts suggest you set aside 3 to 6 months’ worth of living expenses in your emergency fund.
2. Increase contributions to your 401(k)
Another important thing you can do with extra money is increase your contributions to your 401(k).
Investing in your 401(k) is so important, especially if your employer offers a match. Let’s say your employer offers a full 3% match on your contributions, and you earn $60,000 a year. If you contribute 3% of your salary, which is $1,800, your employer will also contribute $1,800, which brings your annual 401(k) contributions to $3,600.
If you don’t have access to a 401(k), then don’t worry. There are plenty of other ways that you can invest and use your extra money.
3. Pay off high interest debt
The interest we have to pay on things like our credit card debt and student loan debt can be pretty high. Debt repayments can take money from our account each month, which is why paying off any high interest debt is a good way to use extra money.
This is because it can actually save you money in the future. Pay off the balance of any high interest credit cards, if you can.
There are lots of methods out there for paying off debt, and we have a post about paying down debts, which you should check out for more information.
4. Put money into a high-yield savings account
Once you have paid off your debts, you could put the money that would normally go towards paying your debts into a high-yield savings account.
That way, your money can earn interest. Savings accounts, unlike stocks, don’t come with risks, and you can use that extra interest to cover living expenses, or just let the savings build over the years.
Sure, not many banks are offering particularly high interest rates, but some are better than others. It’s worth doing because it’s a simple, low-risk way to grow your money.
One thing that you may want to consider is a certificate of deposit (CD)
This is a product that many banks and credit unions offer, and it provides you with better interest rates if you agree to leave a lump-sum deposit alone for a specified timeframe. This could be 6 months, 12 months, or longer.
If you don’t need money right away, then you may want to consider a CD because it can get better interest.
5. Fund an IRA
Okay, so if you don’t have a 401(k), or perhaps you have already contributed enough that your employer is matching your contribution, you could consider investing through a traditional IRA or a Roth IRA.
An IRA, if you don’t already know, is an individual retirement account that’s provided by many financial institutions.
It’s basically a savings account with tax advantages that people can use to save and invest long term.
Now, individual retirement accounts aren’t actually investments, but rather, accounts that come along with tax advantages that can be used to purchase investments.
Because contributions to traditional IRAs are often tax-deductible, and with Roth IRAs, you can take out qualified distributions tax-free in retirements, it means that you won’t have to pay taxes on your investment earnings.
Now, this is something that does require some research. Once you have funded an IRA at an online broker, you will be able to begin filling it with investments. Now, it’s a better idea to invest mostly in diversified funds, like mutual funds. This is because, these funds are made up of many different stocks or bonds, which means that if one company doesn’t perform well, then your portfolio is shielded by the other companies that you are invested in as well.
Now, it’s important to note that both traditional and Roth IRAs do have contribution limits. So this means that you are only able to contribute a certain about of money annually. And, there are limitations on who can contribute as well. For example, for both types of IRAs, you will need to have taxable compensation. For, Roth IRAs, you can only contribute if your modified adjusted gross income is under certain thresholds.
Like, I said, funding IRAs is something that you will want to research.
Now, if you don’t want to choose your own investments, then you can instead choose to open an IRA with a Robo-advisor who will use a computer algorithm to build and manage an investment portfolio for you. This isn’t free though, and it can cost you a fee of between 0.25% and 0.75% of your assets under management.
6. Look at other investment options
401(k)s and IRA’s are good to invest your money in, but those are retirement accounts.
There are plenty of other investment options out there, including investing in individual stocks, real estate investment trusts, sustainable ESG investments, and cryptocurrency.
Of course, all of these types of investments can be riskier than more diversified investments, such as mutual funds, so they should, generally, make up just a small percentage of your portfolio.
Consider other types of investments once you have investments that have set you up for the long term, like IRAs.
7. Save for your other money goals (retirement isn’t the only thing to save for!)
Retirement isn’t the only thing to save for. Sure, it’s important, but there are other things that you can do with extra money other than saving for retirement.
You might want to do things like:
- Save for a down payment on a house
- Start a college fund for your kids
- Invest in your own business
- Save for vacation
- Save for a new car
- Invest in yourself – pay for courses in something you have always wanted to learn about.
So, if you ever wondered “What should I do with extra money?“, you’ve got your answer. Give these tips a try and see your money grow even more.
What do you think is the best thing to do with money sitting in the bank? Let us know your opinions in the comments section below.