Let’s say you have created a budget listing your earnings and your expenses. Good job. Then after that you realize you have some extra money left over after your expenses are all taken care of. That’s even better. Since you’ve got some extra money you might be thinking you can improve your quality of life. Maybe you can take a vacation. Or perhaps you can gamble in Vegas next weekend.
Not so fast. You are supposed to have money left over in your budget. Having this money doesn’t mean you can go splurge on things. Don’t think of this money as “extra” money, because it’s not extra at all. So what do you do with all this cash every month? Here are some suggestions on what you can do with your leftover money.
Pay Down Your Debt
If you have debt, especially credit card debt, pay it off as soon as you can. Once you have taken care of your essential needs like rent, food and utility bills, use that left over money to get rid of your debt. You should figure out what you owe and to whom first. Then you should jot down the interest rates and the balances of each account. You’re going to want to pay off the accounts with very small balances if they are delinquent. Most importantly you want to pay off any card that has a really high interest rate (over 20%) first.
But don’t stop there. Paying off your credit card debt is great, but car loans, student loans and home loans are debts too. Generally speaking, the higher the interest rate, the more motivated you should be to paying off the debt. Usually home loans are of a very high balance and very low interest rate, so it might not be the best idea to pay off that debt. Paying off a car loan is good because you might not have gotten such a great interest rate on it and paying it off is going to help raise your credit score.
After creating your budget, you should ensure you have money left over. Once you’ve done that, you should use the extra money to pay off your debt. If you’ve done both of those things, the next step is to create an emergency savings account. This account should have several months of living expenses. If you feel like your job may be in jeopardy you’ll want to have more like 6-9 months of living expenses in an emergency savings account.
Other Saving Accounts
If you have no debt and already have an emergency savings account there’s still other important things you can do with your left over money. If you have kids you will want to set up 529 college saving accounts for them. These accounts will earn interest tax-free and there’s no penalty for withdrawing the funds if it’s for their college education. You can also choose to add more funds to your retirement account. How much you ask? If you have it, put the maximum amounts allowed.
If you are already saving enough money for a rainy day and for your future, then you should invest the rest of your money. By investing, you will make even more money. This way, you’ll earn interest and your interest will earn interest. This is the secret to creating wealth: letting your money work for you.