Winter is here. Admitting to the change in temperature, you’ve put on your winter jacket for the first time since last year and huzzah! You’ve found an extra $40 in your pocket. There’s no doubt about it, finding extra money is a thrill.
But extra money isn’t just limited to pockets-of-seasons-past. Perhaps you’ve gotten a nice bonus or an unexpected inheritance. Or, maybe Santa was good to you or you’ve earned a raise or finally sold that glassware collections you’ve had boxed up in the basement for years.
No matter how you’ve found yourself with some extra cash, this can be a very good problem to have. But, it also means you have decisions to make, what to do with that extra cash. There are lots of options and what’s best for you will depend on your unique financial situation. Here are a few ideas:
Establishing a Crisis Fund
This type of savings account typically contains a month’s worth of your expenses. Having a crisis fund can give you a cushion to help in the event of financial emergencies.
Having this buffer could help prevent you from relying on credit cards for an unexpected expense.
If you decide to use a credit card—perhaps to take advantage of reward points—this can help to ensure that you can pay off the balance before interest starts accruing.
Taking Advantage of Any Matching Fund Opportunities
Does your employer offer a 401(k) with matching contributions? If so, this can be a powerful tool to help you save for retirement.
Not only does a 401(k) come with certain tax advantages, your employer’s matching contributions can provide a boost to your retirement savings.
Protecting Your Income
Life is unpredictable. No matter how hard you plan, sometimes, things just happen. That means preparing for the unexpected is essential. For example, do you have disability coverage, just in case you can’t work? If you have a family, do you have life insurance?
You may want to take a look at your personal situation and see which policies would be most effective in protecting you and your family.
Finding cost-effective ways to purchase these policies, if you don’t already have them, could be a smart step in protecting both yourself and your family.
Often a financial planner can be a helpful resource to help you determine the types of plans that will fit into your financial life.
SoFi members can schedule a complimentary appointment with a SoFi Financial Planner to better understand the importance of managing risk and insurance.
Attacking Bad Debt
“Bad” debt is generally considered to be a debt that is unsecured, like credit card debt or a personal loan. As you determine which of your debts is “bad,” take a look at interest rates, too.
Anything with an interest rate of 7% or more is likely worth prioritizing. Then you can use the “snowball” approach to pay balances down and then off. (More on that below.)
Using this tactic, you’d prioritize your loans from the smallest balance to the largest; make minimum payments on all of them, but put any extra money you may have towards the smallest balance.
When you pay that bill off, you’d then focus your attention on the next smallest balance, and so forth. In other words, rinse and repeat until your bad debts have been eliminated.
Building Up Your Emergency Fund
In general, you’ll want to have three to six months worth of your expenses in an easily accessible account, one with at least a decent interest rate. If, for example, you’re in a dual-income relationship with no children, then three months may be your target. One income, with kids? You may have more security with six months of expenses saved up.
Building this fund can be a process, so it’s okay to start small and then increase it as you go along.
Although you may not immediately see progress, that will begin to change as you consistently focus on this goal, and is another reason why your emergency fund is a great place to allocate extra money.
When you can, you can boost the amount you put in weekly or monthly until you have a balance that works well for you.
Many times, people put their emergency money in a checking or savings account. Another option, though, would be higher interest-bearing accounts (which are not necessarily with banks); with higher interest, your money can actually grow.
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Saving For Retirement
To be on track for your retirement, a general rule of thumb is to save approximately 15% of your income . You could choose to do this by leveraging Roth IRAs, traditional IRAs, and 401(k) plans to accomplish this.
Saving for Personal Goals
This can include saving for a down payment for your first home, or to upgrade to the house of your dreams. It can also include saving for your children’s college expenses.
Before you add your extra money to your travel fund, it might be worth prioritizing financial decisions that will help you stay on track for long-term goals. While an international vacation is one of life’s “nice-to-haves,” it might not be your number one financial to-do.
Paying Down Your Good Debt
“Good” debt is generally considered to be debt that has potential to improve your overall net worth, like a mortgage loan, student loan debt, and so forth. And, once again, you can use the snowball approach to paying it off.
How far you’ll get down this prioritized list right now will depend upon how much extra money you currently have—but, at a minimum, you can use this list to create your debt reduction plan.
Creating a Complete Strategy to Pay Off Debt
If you have extra money, it could be a good time to put a strategic debt payoff strategy into place. The extra funds could help you to ramp up your momentum. It can include, as mentioned above, focusing first on attacking bad debts.
There are a few strategies to consider as you craft your debt payoff plan. You could use the snowball strategy; or you can combine that with the “snowflake” approach, which means you’d use extra money gained here and there to go beyond paying minimum balances to pay your debt down more quickly.
For example, if your extra income is coming from a side gig, you could apply that income to your debt reduction plan. Or, maybe you’re selling what you don’t use anymore. The same concept applies.
Then there’s the avalanche method, where you’d prioritize your debt from the highest interest rate to the lowest, and then attack the top of the interest-rate mountain first while still making minimum payments on all other debt, of course.
You could even create opportunities for “finding” extra money in your budget, perhaps by going for walks outdoors instead of paying a pricey gym membership, cooking for yourself, and so forth. You can then use the extra cash to pay down your debt.
As one more option to consider, you could consolidate and refinance high interest credit cards into a low interest personal loan, and then only use your credit cards when you know you can pay the balance off in full each month.
You can also consider refinancing your student loans at a lower rate, which gives you the opportunity to pay more on the principal each month.
Simplify, Simplify, Simplify
When you make your debt reduction plan as simple as possible, it typically becomes a more streamlined and stress-free one. One of the easiest ways to simplify your plan can be to set up auto payments whenever you can.
Many financial institutions allow you to set up recurring bill payments or transfers, and you can sometimes transfer more than the minimum amount due.
You may also be able to set up automatic transfers to your company’s 401(k) plan, if you’re participating, and to an account where, for example, you’re saving to buy a home or pay for your child’s college education.
Going paperless can also help you to simplify your finances because you won’t have to stress about finding misplaced paper documents anymore. Instead, they’ll be a click or two away. Many financial institutions will allow you to go paperless, and you can also create your own digital archive of important information.
Apps that can help in this quest include ones that allow you to snap a photo of receipts and then store them digitally.
You can also use other mobile apps to file paperless statements; these can capture receipts, seek out online bills and statements, and automatically download and file them to the cloud.
Tracking Your Finances
To have a chance of successfully managing your finances, you need to first successfully track them. That may not be the most glamorous part of your day, but it’s a great way to get on track for both short-term and long-term financial goals.
Knowing where your money is going is a foundational step for creating a realistic budget that works for you, and this visibility into your finances can also make it easier for you to prioritize what matters most to you.
You might find an online subscription that you haven’t used in months. You might find more than one of them. You may discover that you don’t mind giving up fancy lattes in the morning, just as long as you can still go out to your favorite restaurant each weekend. It’s all about balance, it’s all about what matters most to you.
With a SoFi Money® cash management account, it is easy to track your weekly spending in your dashboard within the SoFi app. It’s easy to know where you stand, financially.
With SoFi, you can also talk one-on-one with a financial planner. Together, you can set goals uniquely tailored to your financial situation and dreams.
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