There will be times in your life when you will earn more money than you need to live or maybe you run into inherited money. What should you do with this extra money? Here are a few things that you can do with that extra cash:
- Pay off any unsecured loans or credit card cards that you hold. Credit is very expensive. Credit cards are the biggest source of unsecured loans in the World today. Credit card companies charge you different rates of interest on different types of money. Cash from an ATM taken with a credit card is a lot more expensive than ordinary shop purchases. Credit cards take your repayments towards shop purchases first and then only later towards the cash withdrawals so that you pay the maximum interest possible for the longest time. Getting a credit card with zero percent interest on balance transfers is always a smart move. There are many deals around so check my credit card reviews, why pay more than you have to?
- Build an emergency fund so you don’t have to use credit when something bad happens. A rule to use would be to reserve as much cash as you would need to live if you were to become unemployed tomorrow. A professional may need 12 months worth of living expenses in order to find a job. A factory worker may only need 3 months of living expenses, as they can find a job faster (this may no longer be true though). Also, set aside an emergency stash for car or home repairs on top of living expenses to cover the time it would take you to find a job.
- Build up your equity in your home and pay down principal. Once you have accomplished paying down high interest unsecured debt, the second step is to build the equity in your home. If you’re considering purchasing a home soon or in the future, push yourself to put down the maximum down payment that you can afford at the time you buy your property (as long as credit card debt is paid off). Avoid including arrangement fees, legal fees or Realtor fees in your mortgage, try and negotiate to have the seller pay for these. Mortgages interest can cost you huge amounts of money over the lifetime of your loan. Whenever you can, pay more than your monthly payment minimum, as most mortgages are front end loaded with interest. This means if you’re in a 30 year note, most all payments in the first half of the life of the loan will be applied to interest, not principal. To build equity outside of property value increases, take surplus money that you come into and pay down your mortgage principal (after credit card debt is paid off). Check out your loan options as well, for example, some mortgage payments can be made on a a bi-monthly repayment schedule, helping you pay down principal faster. There’s a huge difference in interest paid between 30 year and 15-year mortgages, and you can save a small fortune in interest without a significant increase in payment.
- Maximize your 401(k) and or other investments after you’ve paid down debt. When you change jobs, don’t touch that 401(k) retirement fund either. Roll the balance over to an IRA and keep it invested. If your employer is giving you money in the form of matching contributions in a 401(k) or similar, be sure to take advantage of it. Quite often, people use the excuse that they don’t like the investment company offered by their employer, but you can more than make up for any poor selections or returns provided by your company selections with the matching dollars you’ll get, even if that means sticking your dollars in money market funds. At minimum, maximize your contributions to maximize their match.
Instead of taking your extra money and buying toys, boats, TVs or new cars, take that money and pay off debt and start investing. Not only will you save paying thousands of dollars in interest, you can start making your money work for you, instead of always working for your money.