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What To Do With Extra Money
The First Things You Should Do When You Make Extra Money
Maybe you’ve worked hard and got that promotion you were angling for, that settlement you waited for finally paid out, or you hit it big with that gas station lottery ticket. However it happened, you’ve got extra money on hand, but how do you make that money work for you instead of incurring, as they say, more problems?
When your budget gets a sudden influx of cash, the possibilities can seem endless—even overwhelming—but there are a few concrete steps you should take to hang on to that extra money. Let Greater Nevada Credit Union help break it down for you.
Look at the Big Picture
In the same way that a loss of income requires you to take stock, so does a windfall. Start by examining your monthly budget and consider the type of boost you’ve received. Is it ongoing, like a salary raise? Or a one-off like a cash settlement or inheritance? Different types of income will require different types of financial planning.
For example, a higher salary might mean adjusting your overall budget and monthly payments. Use your first full paycheck to create a spending outline, then apportion your income to allow you to pay all necessary bills promptly while setting aside money every month for long-term financial goals or saving for a more significant purchase.
In the case of a one-time cash influx, budgeting is still the best strategy. However, you might allocate the money differently to make the initial sum last longer or make a more substantial change in your life—investing most of it in a retirement fund, for example.
Catch Up on That Rainy Day or Retirement Fund
No matter how you got your extra money, one of the first things you should do is consider the future. It’s nowhere near as fun as hopping on a plane to your dream vacation or buying that sports car you’ve had your eye on, but beefing up your retirement account or keeping your emergency fund stocked is always a smart financial move—one that your future self might depend on.
Ensure you take advantage of benefits like your company’s 401(k) plan, especially if they offer matching contributions. Maxing out your retirement contributions to a tax-free account can give you a significant leg up when retiring early. Even if your employer doesn’t offer one, you can still set up a tax-advantaged Individual Retirement Account (IRA) through Greater Nevada Credit Union.
An emergency savings account for unplanned expenses, such as medical bills, car repairs, or home repairs, should have enough saved to cover 3-6 months of living expenses. Experts recommend that if you have children, you should save closer to a year’s worth of expenses.
Start by choosing a stable, FDIC-insured account to make contributions. Then, decide on a monthly amount you can comfortably set aside to grow your savings over time. Before you know it, you’ll be sitting on a tidy sum you can depend on when you need it.
Ditch the Debt
One of the smartest things you can do with extra money is eliminate any debt that’s weighing down your ability to grow financially. While not all debt is bad, high-interest debt from credit cards or car payments incurs hefty monthly expenses, making your initial debt harder and harder to pay off. Before long, this debt can grow into a bleak financial situation.
Start by eliminating that high-interest debt. You can apply several strategies to pay down debt, including the “debt snowball strategy.” In this case, you pay your minimums on all debts and pay extra against the one with the lowest balance until it is paid off—then you move on to the next lowest until you’re all paid up. This method lets you gradually chip away at debt without paying vast amounts against your highest liabilities.
Meeting with a financial planner can help you find the perfect strategy to tackle your debt once and for all.
Come to Grips With Your Tax Bracket
Speaking of things to pay down first with an influx of cash, pay any back taxes, as the IRS can garnish your wages to recoup what you owe. After you’re square up with the IRS, it’s a good idea to familiarize yourself with your tax situation, as making more money can change the tax obligations you are responsible for.
You might discover a larger difference in your gross salary and after-taxes income than initially expected. For instance, the exact dollar amount you receive in a raise doesn’t necessarily mean you’ll have that to spend as you will have to pay tax on that amount.
Likewise, earning over a certain amount will place you in a different tax bracket, meaning the rate at which your income is taxed will change. To better understand your tax obligations, take-home pay, and ensure you’re taking advantage of every possible deduction, it may be wise to work with a professional accountant for at least the first year you make extra money.
Splurge! (Within Reason)
After you’ve planned and budgeted accordingly, there’s nothing wrong with rewarding yourself! Part of making extra money is enjoying the changes it can bring to your lifestyle. And while it’s not advisable to purchase everything you’ve ever had your eye on, you should feel prepared to make a larger purchase, take a vacation, or otherwise spend your money on something that makes your life more secure and enjoyable.
Extra money is always nice when it comes your way, but proper planning and financial savvy can help you make the most out of a windfall. For more ideas and advice on what’s possible for your situation, contact the professionals at Greater Nevada Credit Union and schedule a consultation. We’re always ready to help!
