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Ever experience the joy of finding a $100 bill in an old coat pocket? This is like that, only better.
When you find yourself with extra money—either from a pay raise or in a lump sum from an inheritance, insurance settlement, tax refund, end-of-year bonus, or other source—you have many wonderful choices. While it’s understandably tempting to run out and splurge, resist the urge. Extra money gives you the unique opportunity to do something that could have lasting impact.
Instead, consider these smart things to do with your extra money
What to do with extra money
1. Build an emergency savings fund
This option is number one for a reason. Experts recommend that you have enough cash to cover three to six months of living expenses. However, a 2021 survey1 found that about half of Americans have less than this, and one in four had no emergency savings at all. So, it’s a smart move to use your extra money to either create a new emergency savings fund or contribute to an existing one. Set this fund up in a high-yield savings or money market account with Global, and then leave it alone except in a true emergency.
2. Pay off high-interest debt
Once you have your emergency savings squared away, it’s time to pay off your credit cards and personal loans. There are a couple of ways you can approach this. One option is to first pay down debts with the highest interest rate; another approach is to pay down the smallest debt first and then move on to the next. Either works; the important thing is to make a plan and stick with it, then avoid the temptation to rack up more debt again.
3. Increase your 401(k) or IRA contributions
Another smart move is to use the extra money to increase your 401(k) or IRA contributions, or open a new traditional or Roth IRA if you don’t already have a retirement savings account. At the very least, you’ll want to contribute at a level that allows you to take full advantage of your employer’s match if that’s an option. Investing extra money in your retirement has several advantages. First, the sooner you invest, the more money you’ll have when it’s time to retire, thanks to the magic of compounding interest. Plus, depending on the source of your extra cash, you could be facing a higher tax bill next April. By contributing to your IRA, 401(k), 403(b), 457(b) or other tax-advantaged retirement plan now, you’ll reduce your future tax bill because every dollar that invested in a qualifying account reduces your taxable income by the same.
4. Buy a home if you rent
Investing in a home can provide financial and personal advantages; it’s a smart way to use the extra money. Many first-time home buyers list the down payment as their biggest hurdle to home ownership. The extra money may be your answer. And even if your eventual mortgage payment is the same as your monthly rent, you’ll be building valuable equity in the home. Homeownership also provides tax savings, since you may be able to deduct your mortgage interest and property taxes from your taxable income, up to a certain limit.
5. Refinance your mortgage if you own
Refinancing costs money, but depending on the terms of your new mortgage, money you spend to refinance could save you in the long run. For example, you could refinance from a 30-year to a 15-year mortgage; use your extra money for the higher monthly payments. Or you could refinance and use your extra money to pay closing costs (currently running up to 5% of the loan amount) in exchange for a lower interest rate. Another option would be to use your extra money to make a lump sum payment against your existing mortgage, then refinance the remaining smaller balance. All three options could save you thousands in interest over the life of the loan.
6. Save for other life goals
Extra money gives you the ability to set aside money for other things, like college savings for your children, a vacation or retirement property, a new boat, your child’s wedding, or a travel fund for yourself. If you qualify, you could add funds to your health savings account (HSA). You could even use the extra money to make home improvements, which increases the value of your home and therefore builds equity. If you’ll need the money sooner than later, put it into a high-yield savings or money market account with Global; for longer-term goals, consider a certificate account. If your goal involves college savings, consider a 529 Plan or a Coverdell Education Savings Account. Learn more about Global’s college savings plan options.
7. Invest in your own professional development
Investments you make in yourself can be among the most valuable and rewarding. Recent years have increased opportunities for online learning, which gives you more flexibility than ever to learn new skills or pursue a new career. Want to become a plumber or electrician? Get your realtor’s or insurance license? Go back to school to learn a new trade? Join a professional association to establish a new network? Money you spend now to get an advanced degree, a professional certification, or even learn a new language can make you more valuable to future employers and provide better long-term earning potential. It’s the gift to yourself that keeps on giving.
Final thoughts
Regardless of whether your extra money comes from earning more than you need each month, or it comes in a lump sum, be purposeful in how you take advantage of your good fortune.
