If your budget turns up a surplus of funds, you might wonder what to do with extra money. Should you save it, invest it, or go on a spending spree?
The answer is likely a mixture of all three, but it depends on your current financial situation, your financial goals, and risk tolerance.
What To Do With Extra Money
Knowing what to do with extra money can help you make sound financial decisions. Here are the top 8 ways to handle your extra money wisely.
- Pay Off High-Interest Debt
- Save
- Invest in Your Future
- Diversify Your Investment Portfolio
- Explore Passive Income Opportunities
- Increase Your Investment Contributions
- Splurge Responsibly
- Invest in Yourself
1. Pay Off High-Interest Debt
When you pay off high-interest debt, you’re investing in yourself. Think about it this way: If you pay a 20% APR on your credit card debt, you likely can’t earn 20% on any investment you make, even investments with high returns.
You come out ahead when you pay off the high-interest debt first before doing anything else. While it doesn’t feel like you get anything in return, you’re giving yourself peace of mind and freeing up future money for other financial goals.
2. Save
Of course, it’s always a good idea to save money, and if you have extra money, why not? First, focus on saving an emergency fund. This is money you set aside in a separate account for true emergencies, like job loss, becoming ill, or other financial emergencies.
Next, you can save money for other personal goals, whether for a vacation, a large purchase, college expenses, or retirement.
Before saving money, consider where to keep it, and try to keep the funds separate from your spending money.
High-Yield Savings Accounts
High-yield savings accounts are online accounts that pay yields as much as 10x higher than local brick-and-mortar banks. High-yield savings accounts pay higher interest rates, typically have no fees, and don’t often require a minimum deposit.
CDs
CDs are timed deposits that also pay higher interest rates. However, you must commit to the timeframe for the CD, or you’ll pay an early withdrawal penalty. Fortunately, there are CDs with terms as short as one month and as long as ten years to give you options.
Money Market Account
A money market account is a cross between a checking and savings account. They typically pay high interest rates but allow the option to write checks; some come with debit cards. Many banks require a minimum balance, too. Since the point of saving money, however, is not to spend it, only use this option if you have restraint.
3. Invest in Your Future
Don’t forget to invest in yourself! There are many ways to invest in your future. Here’s what to consider.
Retirement Savings
Even if you are in your early 20s, it’s never too early to save for retirement. Thanks to compound interest, the sooner you save, the more money you’ll have in retirement. Plus, the sooner you start your retirement savings, the less you must save each month to reach your retirement goals.
College Savings
If you have kids that you think will be college-bound, and it’s your goal to help them with the expenses, consider starting a college savings plan now. You can invest in the 529 savings plan in your state or others; just make sure you understand the tax consequences and benefits you may enjoy by saving for college now.
Rainy Day Savings
It’s okay not to have a goal to save for and just have a ‘rainy day’ fund. Any money you save for your future, you’ll likely put to good use. You’ll be glad you did when, one day, something unexpected comes up, and you want to take advantage of the opportunity and have the money saved for it!
4. Diversify Your Investment Portfolio
If you have extra money, go ahead and diversify your investment portfolio. If you currently have only a savings account or a specific type of investment, like stocks, use your extra money to invest in other things.
Here are a few common ways.
Real Estate
There are a couple of ways to invest in real estate. You could buy a property and rent it to tenants or buy a fix-and-flip, selling it for a profit. If you only have a little extra money, consider investing in crowdfunding. This real estate investing method allows you to invest in commercial real estate properties with other investors. In some cases, you can invest in real estate with as little as $100 and earn a prorated amount of the profits.
Stocks
Of course, the stock market is always an option, even though it’s slightly riskier than real estate. If you don’t have much to invest, you can even buy fractional shares using a robo-advisor like Robinhood. Just make sure any money you invest in the stock market is diversified, meaning don’t put all your money in one company or industry. Diversify across several so you don’t lose everything if one stock plummets.
Bonds
If you’re looking for something more conservative, consider investing in bonds. This is always a good way to balance the risk stocks create. Bonds have much lower yields but little to no risk, especially if you invest in government bonds.
5. Explore Passive Income Opportunities
Your extra money may be able to buy you passive income opportunities. This option may require some work on your part, but eventually, these methods turn into passive income opportunities.
If you’re wondering what to do with extra money and need something to fulfill yourself, here are some great options.
Rent Your House, Car, or Household Equipment
If you’ve invested in a house, car, or storage space, you can turn it into passive income. You can list houses for rent on Airbnb, renting when you are away or if you have a second home. You can list cars on Turo, renting to people who need a car for a few days or weeks based on what you can offer, and storage space does well on the Neighbor app.
Micro-Investing
What if you could get paid to spend? Micro-investing apps like Acorns help you invest by rounding up your purchases. Let’s say you spend $10.50; Acorns would round it up to $11 and invest the $0.50.
It doesn’t sound like much, but think about how often you use your debit or credit card. Each time you swipe, you could be investing, and the change adds up fast!
Sell a Course or eBook
Another fun thing to do with extra money is to invest in the equipment needed to sell a course or eBook. If you specialize in a topic that others would love to learn about, you could teach a course or write a book once and then continue selling it as many times as people will buy it.
6. Increase Your Investment Contributions
If you already have a solid investment plan created, increase how much you invest. This is a simple change, even if you have automatic investments set up; just increase your monthly contributions or whatever increments you invest in, and you’ll increase your potential earnings when the investments perform well.
7. Splurge Responsibly
Spending money on yourself is okay when you have extra money. Too many people make themselves feel guilty and assume their extra money must go to something ‘responsible.’
Splurging responsibly is the best of both worlds. If you work it into your budget or save for a big goal and reach it, reward yourself. You deserve that vacation, large purchase, or whatever else you’ve saved for and accomplished. The key is not to go overboard. Budget your spending and ensure you know what to do with your extra money after treating yourself.
8. Invest in Yourself
Investing in yourself is one of the best things to do with extra money. This could mean returning to school, signing up for training or courses to improve your skills in your current career, or completely pivoting and trying something new.
Mistakes People Make When Deciding What To Do With Extra Money
When deciding what to do with extra money, watch out for these common mistakes:
- Not having a plan: Think about how you’ll use your money and how it might affect your future finances. Spending without thinking can lead to overspending and bad financial decisions.
- Putting all eggs in one basket: This is especially important when investing. Diversify your efforts so your money has many opportunities to grow, and you don’t risk losing everything with one bad move.
- Not saving for emergencies first: Your emergency fund should be the first thing you save for; you can reach other financial goals afterward, but emergency funds should come first.
- Not investing: Investing doesn’t always have to be risky. You can invest in savings accounts, CDs, and bonds to keep things conservative. But you need compound interest or earnings from multiple investments to grow your money.
FAQs
Knowing what to do with extra money is important. You should always plan and revisit your plan to ensure your choices still make good financial sense.
Should I Consider Professional Advice for Investment Decisions?
Discussing your investment decisions with a professional is not a bad idea. If you don’t want to pay the advisory fees, you can invest using robo-advisors, which use algorithms to help you make investment decisions.
Is It Wise To Use Extra Money for Home Improvements or Major Purchases?
Investing in your home is a great idea if you’ve saved an adequate emergency fund and don’t have high-interest debt. The home improvements or major purchases may help improve your home’s value, giving you a great return on your investment.
Can I Use Extra Money To Start an Emergency Fund From Scratch?
If you don’t already have an emergency fund, starting one from scratch is very important. You can start an emergency fund with as little as $1 if you want. The key is to start it and then create a plan to contribute to it regularly.
How Can I Strike a Balance Between Enjoying Extra Money and Being Financially Responsible?
Create a budget that ensures you cover your financial responsibilities and save for your future but still have extra money to enjoy yourself and buy what you want.
The Bottom Line
Knowing what to do with extra money can give you peace of mind. Believe it or not, extra money causes some unease because you don’t know what to do. Creating a plan and knowing exactly how you’ll use your funds is the key to achieving your financial goals.
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