You Have Extra Money! Now What?
MONEY MANAGEMENT SERIES
- This is Your First Step to a Successful Money Management Plan
- Knowing Your FICO Score is a Key Component to a Solid Financial Plan
- Evaluate Your Financial Situation and Make Changes Where Needed
- You Have Extra Money! Now What?
In our Money Management Series of posts, we’ve covered the first step toward a successful money management plan, the importance of a strong FICO score and how evaluating your financial situation can bring into focus needed changes that will strengthen your financial position.
The end result of these efforts, more likely than not, will be extra money.
For some, the urge will be to spend that available cash. Which is normal. It’s how most humans are wired.
And it’s also how many of us fall into debt.
So it’s vital to access all your available will power and resist the urge to spend, focusing instead on productive avenues for that extra money.
What to Do With That Extra Money
If you’ve already focused your efforts on paying down credit card debt, and made inroads in that regard, then it’s time to look toward other financial goals.
An Emergency Fund
Once credit card debt is being addressed and you have some extra money available, building an emergency fund takes top billing on your financial to-do list.
Some will say an emergency fund should wait until all your credit card debt is erased. I disagree.
Emergencies will most assuredly rear their ugly head. An unexpected car repair here, a furnace on the fritz there, an emergency room visit that was definitely not wanted nor covered fully by your insurance…these types of events will arise at the most inopportune times.
Having some cash set aside for when they do will keep you from adding back the credit card debt you’ve just cleared away.
A goal of $1,000 in an emergency fund is what most should shoot for.
For some, that won’t be too difficult. For others, it will take a while to get there.
The important point is to begin the process of saving toward that emergency fund goal.
And the absolute best way to do that is to set up a separate savings account dedicated solely toward your emergency fund.
A savings account at the same bank at which your money currently resides is good.
Even better, though, is a savings account at a completely different financial institution where access may not be as easy as transferring from one account to another within the same bank.
You want your emergency fund accessible, but not so easily accessible that it becomes your “let’s party” money when boredom sets in.
High Yield Savings Accounts are great options for emergency funds. To be able to pay a higher than normal yield on deposits, most are online only and not affiliated with traditional brick and mortar banks.
You can read our piece on High Yield Savings Accounts here, and check out our High Yield Savings Accounts page to see a few examples of available accounts.
Setting up automatic transfers, at regular intervals, to the savings account of your choice will result in a fully-funded emergency fund before you know it.
Once you’ve hit that $1,000 mark, or a total you feel comfortable with, it’s time to turn your money-saving focus elsewhere.
Invest for the Future
Now that you’ve built your emergency fund, it’s time to take that extra cash and invest for the future.
And by investing, I mean putting money in the U.S. stock market.
Over time, there is no better vehicle to grow your money that the stock market.
And through the magic of compounding, small investments of money, made regularly, will grow significantly over the years.
The key is to start. Period.
The earlier in life, the better.
But if you’re older…and I won’t define older, because it’s never too late…the time to start investing is now.
Just open an investment account…for most a Roth IRA will be the best route…and start funding it.
Investing can be complicated. But it doesn’t have to be.
For the vast majority of people, an index fund – or two – is all you need to begin investing for your future.
Vanguard is one of many investment management companies, but for those who don’t know where to start, it’s the one I recommend.
It was founded by John Bogle, whose focus was on low-cost investment funds (index funds). And while Vanguard has branched out to offer a variety of investment products, it still offers a number of low-cost index funds that are ideal for those beginning their investment quest.
To truly simplify your initial investment vehicle, select a Target Retirement Fund based on your desired retirement date.
Target Retirement Funds invest in a handful of index funds, lowering the risk level by effectively spreading your money amongst U.S. and international stock and bond index funds. This diversification provides exposure to a variety of major market sectors and segments, and automatic rebalancing maintains your investment goals as the years tick by. All of this while keeping the fees you pay low, resulting in more of your money being invested for you.
And Target Retirement Funds typically have lower minimum investment requirements…usually $1,000 rather than the normal $3,000 or more.
Additional contributions can be as low as $1, but you’ll want to invest a bit more than that on a regular basis.
As you did when building your emergency fund, you’ll want to set up automatic transfers/investment amounts to your IRA. To start maybe $25 every other week, increasing that once you, and your budget, get comfortable.
As long as the money is automatically transferred, there’s a very good chance you won’t even miss it…which is why automatic saving/investing is a vital tool for securing your financial future.
Then just sit back and let your money grow.
Most assuredly, there will be ups, and downs, over the years, but historically those bumps have smoothed out, leading to a gradual, regular, upward growth trend that will increase your net worth over time.
And with larger monthly contributions as your financial situation improves, you’ll find your “future money” growing even faster.
Wrap Up
Bettering your financial situation is a process.
We’ve provided the plan for success in our first three posts of this Money Management Series.
The key to getting out of the debt trap many Americans face and moving toward a stable financial position lies in following that process and utilizing the excess money you’ll generate as a result to save and build for the future.
Financial surprises will hit, and having money available for when they do is the difference between depleting some of your financial cushion or going into debt.
With an emergency fund in place to help buffer those unexpected expenses, all that’s left to do is begin building for your future with investments that’ll grow your money all on its own.
Regular contributions, and a look every once in a while to ensure your investment goals remain on target, will go a long way toward ensuring a sound financial future for you and your family.
wallet image courtesy of scottchan at freedigitalphotos.net
