Whether it’s a stimulus check, a tax refund, or an inheritance from your great aunt, extra cash can make a difference in your finances. So it’s important to think carefully about how you’re going to use it. If you have a credit card or other high-interest debt, paying it off might be a good move. But a little extra money could also give a nice boost to your retirement account. So how do you decide on the best way to use it?
First Things First
You never know when you’ll need money for expenses you didn’t plan on. So if you don’t already have an emergency fund, consider putting your extra cash toward saving three to six months’ worth of living expenses. Our emergency savings calculator can help you determine how much savings you may need, based on your actual monthly expenses and income.
The Case for Investing
Investing your extra cash offers you the chance to acquire additional assets with the potential for growth. If you have a long investing time horizon and your investments perform well over the years, the money you invest could be worth significantly more in the future than your original investment. If you don’t already have a supplemental savings plan, consider enrolling in a 457 program if your employer offers it.
If you’re behind on saving for retirement but still want to build your emergency fund, a Roth IRA may be the answer for you. Because your contributions are always available to you without penalty, a Roth IRA is one way to save for retirement while supplementing your emergency fund.
Living with Less Debt
Credit card interest rates can be high, and the interest you pay on your personal cards is generally not tax-deductible. If you’re carrying a balance, using the extra cash to pay off or reduce your debt can be a smart move. Prioritizing high-interest debt first can also save you the most in interest payments. As for personal loans, a good rule of thumb may be to pay down a loan charging nondeductible interest when the interest rate is higher than any potential returns you might earn on an investment.