In your life, there are many “money milestones” that you may encounter as you work, save, and spend. Incidentally, some of these will be less pronounced and obvious than others. Case in point, I’ve recently come across a milestone that managed to creep up on me: having a surplus of funds.
Although it’s been a while since I’ve worried about living paycheck to paycheck, I never got the sense that my funds were growing either. That was until I realized that not only were the figures in my regular checking accounts getting larger but that I had also managed to accrue some decent savings thanks to various automations I’ve set over the past few months. As a result, my wife and I have been thinking about a what to do with this extra cash in order to make the biggest positive impact on our finance.
For those who find themselves in a similar situation, here are few wise ways to utilize your surplus funds:
Emergency Funds
If you don’t already have a designated emergency fund that you can rely on in the event of major unexpected expenses, this should be your first priority. As I’ve discussed in the past, a frequently cited figure for how much your emergency fund should contain is between three and six months worth of essential expenses. That way, should you find yourself out of a job or faced with another situation that would otherwise wipe you out financially, you’ll be able to weather the storm and rebound much more easily.
Of course, while having accessible funds earmarked for emergencies is a must, this doesn’t mean you need to keep all of this money in one place. Depending on your situation, you might consider options such as online savings accounts or money market accounts that will enable to earn on your money instead of letting it sit dormant. Just remember that, wherever you stash this emergency cash, it should be liquid and easy to access.
Other Preparations
After you’ve added some security to your finances by building a fully funded emergency fund, it’s time to plan for some other obstacles that could get in your way of you and your money. A classic example of this revolves around taxes. Although millions of Americans look forward to receiving tax refunds each year, there are plenty of others that get hit with a bill from Uncle Sam each April. This is especially true for freelancers.
As a self-employed worker myself and with my wife joining the freelancing train this month, one of the things we constantly need to remind ourselves is that we don’t really have as much money as it seems. Let me explain: with most jobs, your paycheck would have taxes withheld, leaving you just your net pay. Not so with freelancers — the cash we get is the gross and it’s up to us to figure out what we owe the government. Because of this, my wife and I have gotten into the habit of putting a percentage of our pay aside in anticipation of tax time. Given our fluctuating income, we actually accomplish this with manual transfers, although there are plenty of ways to automate such savings so you don’t forget. So before moving on to these other suggestions, make sure to have this step checked off as well.
Save Up for Other Milestones
Given my limited space demands and overall lack of handiness, there are many things I like about living in an apartment. On the other hand, there have been plenty of times my wife and I have discussed buying a house of our own. Yet, there’s one way you can gauge how serious about this prospect we are: the amount of money (or lack thereof, in this case) we’ve saved up for a down payment.
Whether you’re buying a car, a home, going back to school, or making some other large purchase, there are plenty of reasons why it’s best to have a sizeable down payment first. In fact, you could even strive to cover the entire costs upfront (okay — that’s a little hard for a house, but a car is definitely doable). This plan of attack will not only save you money on interest but will also allow you live with one less debt — speaking of which…
Pay Down Debt
Since you have all this so-called “extra cash,” that must mean you have all of your debts paid off, right? RIGHT? While I would sincerely hope that your currently free of credit card and other expensive debts, there are some understandable debts you might have, such as a car loan or mortgage. Still, if your cash flow allows for it, it might be worth making additional payments on these obligations.
Like I said, there’s nothing inherently wrong with having a mortgage even though it is a form of debt. However, paying off that debt early could allow you to save a significant amount of money in interest. At the same time, there are other considerations to be made (such as those we’ll discuss in a minute), so this might not be the biggest priority for each person.
Retirement Savings
As a wise man named Ferris once said, “Life moves pretty fast.” How right he was. Because of this universal truth, it’s important that you not only focus on your immediate financial needs but also set yourself up for the future. This means saving for retirement and ensuring that you’ll have enough cash on hand to live off of after you’re no longer able to work.
Retirement savings come in many different forms, the most popular of which are employer-directed 401(k)s. What’s great about these accounts is that, in addition to contributions coming directly out of your paycheck, your employer might elect to match your money to a certain percentage. If for some reason you’re not taking full advantage of this, that should be among the first changes you make to your finances.
Another common retirement account is known as an IRA, which just stands for “individual retirement account.” Compared to 401(k)s, IRAs have a few pros and cons. On the plus side, IRAs present you with a number of investment options while your 401(k) will likely leave you very few. The downside is that amount you can contribute to an IRA each year is far lower than what you can legally contribute to a 401(k). In fact, the current the annual contribution limit for those under 50 is $5,500 for IRAs while 401(k) allow for up to $18,500.
All of this brings me to my point: if you can afford to, making that maximum contribution each year will really pay off once you reach retirement age. Moreover, it may be worth looking into Roth IRAs, which require you to pay taxes on your money upfront but will allow you to take the money — including the gains — out tax-free once you reach retirement age. Trust me, your future self will thank you.
Start Investing
Beyond your retirement accounts, have you ever considered investing? If not, it’s likely because you’re under the impression that you need a lot of cash to get started or have images from Walt Street pop into your head whenever you hear the words “stock market.” Well, thanks to technology, investing in the stocks, bonds, and more isn’t nearly as intimidating as it once was.
If you’re looking to get your toes wet, you might want to check out apps like Acorns or Robinhood that make it easy to be a small-time investor. While the former allows you to essentially invest your spare change in a portfolio they select for you, the latter offers commission-free trading on stocks you choose yourself. Personally I’ve only dabbled in using Acorns in the past but recently got back on board. As for Robinhood (which I literally just finished signing up for), they’ve recently announced support for buying and selling cryptocurrencies. Admittedly, Bitcoin is probably not the best place to start when you’re just getting into the world of investing, but it’s an interesting development nonetheless.
Regardless of whether you decide to check out these apps, look into more traditional means of buying stocks, or test out alternative investments like peer to peer lending, there are many opportunities to put your extra money to work. That said, remember that all investments involve risk so don’t invest any cash you can’t afford to lose.
Having extra money is clearly a great problem to have… as long as you use it wisely. If you’ve managed to check off things like having an emergency fund and preparing for tax time from your list, you might consider saving up for your next big purchase, making extra payments on your current mortgage or car payment, increasing your contributions to your retirement accounts, or exploring your investment options. Whatever you do, don’t let your money just sit there — give your surplus funds a job to do that will befit your finances overall.