It can be exhilarating to receive a windfall of cash, whether it’s through a bonus, a pay raise, a tax refund, or an inheritance. With an extra chunk of money, your imagination may run wild with things you can spend it on—perhaps a new car, a dream vacation, or a big-screen TV.
As you determine what to do with extra money, make sure to consider using the money to invest in your financial well-being. After all, it’s is an opportunity to rev up your savings and plan for the future, which is one of the best rewards you can have.
Here are five simple ways you might use extra money to splurge on your financial well-being.
Fuel Your Retirement
If you are participating in your employer’s retirement plan, perhaps a 401(k), consider using your bonus or pay raise to increase your contributions. Most firms would automatically deduct the money from your paycheck and invested it in your account, so you may not miss it. Plus, you’ll take a step forward on the path to building your nest egg for a more secure future and perhaps an early retirement.
If your employer doesn’t offer a retirement plan or if you want to maximize your retirement savings, consider contributing to an Individual Retirement Account (IRA). As long as you have earned income for the year, you can use your unexpected cash to make a contribution. For 2019, individuals under age 50 can contribute $6,000, while those over 50 can save $7,000. Contributions to IRAs can have various tax advantages. Traditional IRAs provide a tax deduction for the tax year that you make the contribution. In the case of Roth IRAs, you can receive tax-free withdrawals during retirement.
Start or Replenish an Emergency Fund
When you consider what to do with extra money, remember that having emergency funds is essential to staying on your financial path. Yet, nearly 44% of adults can’t cover a $400 emergency expense without borrowing money or selling something, according to a report from the Federal Reserve. Don’t be one of them.
If you run into extra money and you don’t have savings for unexpected events like a job loss or medical expense, set up an emergency fund. Some financial professionals suggest having a cash reserve of three to six months of expenses for essential bills like mortgage/rent, utilities, and groceries.
Because you’ll want to be able to access emergency money quickly, you may wish to put it in a checking or savings account, money market fund, or short-term certificate of deposit (CD). CDs generally offer a higher yield than checking or savings accounts, but you may pay a penalty if you withdraw the funds before the CD matures. Pay Down High-Interest Debt
If you have any high-interest revolving debt, using extra funds to pay down what you owe could significantly help your long-term finances. The average credit card interest rate is over 16%, so paying down an outstanding balance can help you save hundreds or even thousands of dollars by reducing the principal and therefore the interest that you owe.
Plus, reducing credit card debt may give you some peace of mind and let you focus on your savings goals. Meanwhile, your credit score will also likely improve, so you could qualify for lower rates on, for example, mortgages or car loans.Pursue Your Short-Term Plans
Consider using a surge in cash flow to achieve some of your short-term goals. For example, if you’re thinking about buying a home, or remodeling your home or installing a pool in the next few years, you could use your extra funds to start a specific account for that.
Short-term bond funds are another way to grow your money for near-term goals. Keep in mind that these funds are traditionally safer than stocks because they are less likely to lose value, but their gains may be fairly modest.Advance Education Goals
If you have children or grandchildren, consider investing in their education by starting a college fund. Putting extra money toward 529 or other college savings plans may offer you tax benefits, including the potential for tax-free growth and tax-free withdrawals for qualified expenses.
Or consider investing in your own education. An advanced degree may spur career growth and boost your income potential in years to come. Explore college saving benefits and choices, and consider setting aside extra money toward your educational goals.
The Bottom Line
It’s natural to want to pamper yourself with a luxurious splurge when you have a windfall of cash. However, it’s important to keep your spending in check when you figure out what to do with extra money, especially if you carry debt or have other goals that your new money could help you meet. So before you buy on impulse, ask yourself if you really need the item, or whether it will help you get to where you want to be.