SHORT ANSWER: When you find yourself in a situation with extra money, first pay down high-interest debt. Then use the funds toward investments, such as retirement, 529 plans or your brokerage account. And spend a little bit to treat yourself.
Maybe a side hustle started paying off or you got a bonus at work and now you have an influx of cash. And don’t forget the most common springtime paycheck – your tax refund. Now the question becomes what to do with savings to make it work hard for you. You could pay down part of your mortgage, invest the funds or do something nice for yourself. You can find a number of strategies when you have money to put toward various use cases. Read on to learn how to use extra money wisely to improve your financial standing.
What to Do With Savings: 10 Smart Things to Do With Extra Money
Consider the wisest ways you can spend extra money. Take a look at these smart financial moves to make when evaluating what to do with extra money.
1. Pay Off Debt With the Highest Interest Rate
Paying off debt isn’t that exciting, but it is a great way to make extra money work hard for you. Credit card debt can come with interest rates up to 27%. If you were to invest the extra money that you now have, you would be hard-pressed to earn that kind of interest.
In most cases, the same is true for student loan debt, though those interest rates tend to be closer to 6-8% depending on your terms. But just the same, earning 6-8% on your extra cash through investments will be challenging, meaning you’re better off paying down debt.
2. Build Your Emergency Fund
If you don’t have an emergency fund built up yet, now is a smart time to start increasing one. You’ll get peace of mind knowing that you’ll be able to cover unexpected household or medical expenses.
You should have 3-6 months of your take-home salary saved and accessible. Place that money in a money market or high-yield savings account to help it keep pace with inflation. For example, you could add a little more to your emergency fund each month after you get a raise to help cover major expenses almost without noticing a difference in your monthly take-home pay.
3. Pay Down Your Mortgage
If you have an interest rate on your mortgage that is higher than 4%, paying down that debt will make your extra cash work harder for you than it would if you were investing it. Most investments, CDs or high-yield accounts top out at about 4%.
Putting a lump sum down on your mortgage will make every monthly payment work harder for you because more of that money will go toward your principal since you’ll be paying less interest. It might feel like putting a few thousand dollars toward your mortgage doesn’t make a huge difference, but you’d be amazed at what a shift of just $20 per month more toward your principal will do to shorten your loan timeframe and reduce the amount of interest you’ll pay on the loan over its lifetime.
4. Add to Your Retirement Account
When you have an emergency fund and no high-interest debt, you can put extra funds toward your retirement savings. Open an IRA to diversify your retirement savings and give yourself additional options for how to save toward retirement. Set a goal to put 10% of your salary in that account each year and watch your financial strategy and ability to retire flourish.
If you aren’t currently maxing out your 401(k) benefit at work, increase your contributions for a few months. Your paycheck will be smaller, but you can use that extra cash you have to cover expenses while you get the most for your savings.
5. Put it in Your HSA
A health savings account (HSA) can help you prepare for the unexpected. Enjoy tax-free contributions and distributions once you need the funds. Once you reach a certain threshold in your account, you can start investing your HSA funds to help them grow and cover medical expenses now or in retirement.
6. Invest in Education
Put the extra funds in a 529 plan to invest in yourself or someone you love. Education can help you grow your career or help put your child on a path toward financial success. In many states, you’ll get tax-advantaged savings from a 529 plan. You’ll save the money tax-free in your state. As long as you use the funds toward qualified educational expenses, you’ll take distributions tax-free as well.
If you hope to grow your career through advancing your education, this could be a smart way to save and collect investment earnings.
7. Invest in Real Estate
In cases where you’ve come into large sums of money, investing in real estate might be wise. You can purchase an investment property in a vacation town where you use it as a short-term rental or purchase property in your hometown and rent it out long-term for lower maintenance rental properties.
8. Build a Business
Now might be the right time to purchase a franchise or take a step back from your current job to invest in the business you’ve always wanted to start but didn’t have the time or cash flow to get started.
Starting a business can offer you the flexibility in your work that you’ve always wanted while also giving you something that you could later sell when you’re ready to retire. Or you can pass it on to your children to help build generational wealth.
9. Save it Toward Large Financial Goals
Place the funds in low-risk savings as you prepare for a large purchase, such as a new home or car. Don’t just let the money sit in an account earning low interest rates. Put the money to work for you in a CD or other low-risk investment vehicle. You don’t want to risk losing your principal investment since you’re saving toward an important goal.
10. Open an Investment Account or Add it to an Existing One
If you don’t yet have an investment portfolio, now could be the perfect time to get started. With a brokerage account, you’ll have access to tools like real estate investment trusts (REITs) to invest in real estate or stocks that could pay dividends to help your money grow. Consider a robo-advisor investment account if you aren’t confident in choosing and managing your own investments.
11. Treat Yourself
As you look at what to do with money that is not part of your budget, set aside a certain amount of the funds and treat yourself to something nice. It’s not every day that you come into money. This is the perfect opportunity to care for yourself and your well-being with a treat of some kind. However, try not to spend it all on something nice. Consider using the 50-30-20 rule with the funds and only spend 30% of the funds toward your wants. Then invest or strategically use the rest.
Using Extra Cash to Build Financial Advantages
When you come into extra cash for any reason, such as an inheritance or tax refund, you should first look at how you can use those funds to help better position yourself financially. Do one nice thing for yourself or your household and use the rest to pay down debt, invest and prepare for your future with retirement funds or building an investment portfolio.
About Rebekah Brately
Rebekah Brately is an investment writer passionate about helping people learn more about how to grow their wealth. She has more than 12 years of writing experience, focused on technology, travel, family and finance. Her work has been published in Benzinga, Hearst Bay Area, FreightWaves and Dallas Observer publications.