What to Do With My Extra Income?

Let’s assume you’ve met all your needs. You have paid for everything you need and some of what you want for the month.  You have paid the minimum on all your debts.  Now it’s the end of the month and you have a little left over sitting in your checking account.  What should you do with the extra left over?

There are differences between everyone’s financial situation, and there are some foundational steps that almost everyone should take to build a strong financial base.

Save at least $1,000 that is in a separate account that you do not need for immediate expenses.  This is not a saving for a vacation fund, this is not your monthly expenses fund.  This is for emergencies.

Check to see if your employer offers a match on their 401k.  If they do, that is part of your compensation package, and you would be losing money not to take it.  This will offer you a 50% or even 100% immediate return.  There is no other investment that can guarantee anything close to that rate of return.

High interest debt, especially credit card debt can be destructive to your financial success.  After you have paid the minimums on all your debt, evaluate the benefits of the Avalanche or Snowball methods of debt pay off. You will pick 1 of your debts, either the smallest balance or the highest interest rate and focus all your extra income on that one until it is paid off.  Then turn your attention to the next debt.  Repeat until all your high interest debt is paid off.

The next step is building a larger emergency fund.  Typically, we advise anywhere between 3 – 6 months.  If you are a single individual with uncertain or irregular income, I would lean towards the 6-month end.  If you are part of a married couple with flexible expenses, good job security and consistent income, I would lean closer to the 3-month end.

After you have a larger emergency fund, we can turn to focus on your moderate interest debt.  It will be a similar process to paying off your high interest debt.  After you have paid the minimums on all your debt, evaluate the benefits of the Avalanche or Snowball methods of debt pay off. You will pick 1 of your debts, either the smallest balance or the highest interest rate and focus all your extra income on that one until it is paid off.  Then turn your attention to the next debt.  Repeat until all your moderate interest debt is paid off.

Before you invest, evaluate merits of investing in an IRA vs Employer plan vs non-qualified and ROTH vs Traditional.  Each has different tax treatments, different contributions rules and restrictions around withdrawals.  Invest in an asset allocated, diversified portfolio that rebalances periodically.  Continue to increase your contributions until you are contribution at least 15% of your pretax income.

After you have completed all these steps, take some time to determine what your short, medium, and long-term goals are. Some popular goals we hear often include:

1. Retire Early – Save more in retirement funds or non-qualified investments so that they will be able to replace your income earlier
2. Save for children’s/grandchildren’s education – Invest with a 529 account to save in a tax efficient way
3. Vacation – Save in a bank account, we don’t want to invest in something that might lose money in a few months or years when you want to take your vacation
4. Pay down mortgage – Evaluate your interest rate and time frame, and decide if it makes sense to pay down your mortgage, or if that income could be spent better elsewhere
5. Save for car/home down payment – If you know you’re going to need to purchase a house or a car soon, saving extra for a down payment or even the whole purchase can save a huge amount in interest.  Especially getting to 20% down payment for a house can save interest and Private Mortgage Insurance (PMI)
   

After you have completed these steps, or if you have any questions about one particular step, give us a call. It can be much easier to motivate yourself to accomplish your goals if you have someone to help hold you accountable.  Give us a call or email and we can set up a time to go over your financial goals.