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I'm Making Extra Money, What Should I Do with It?

When you're making more money than you need, saving is a great option for the overflow. But how, and for what? Here's how you can maximize your extra money.

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The number in my savings account has always served as a mental mile marker, an indication I’m moving in the right direction.

In the past, if the numbers stayed stagnant or, heaven forbid, dropped, the anxiety instantly gurgled in my stomach. My sanity was directly linked to the digits in my account. Without progress, I feared I was backpedaling into financial doom.

Welcome to the world of an anxiety-prone money hoarder.

I squirreled away money from the time I was young. I never felt comfortable spending my full allowance. I saved every dollar from my high school graduation. I suffered full-blown panic attacks when an out-of-state move nibbled away the savings I'd accumulated.

Taking a good financial habit like saving and injecting it with steroids doesn’t make it a better financial habit. Instead, it can actually turn some of those positive effects into not-so-positive effects. Like making money moves to pacify a feeling, not because they're the best financial decision.

My money hoarding tendencies escalated when I began earning a salary above what I needed to pay my bills. I became even more obsessed with seeing the numbers increase each month and I never cashed in on my newfound financial flexibility. I didn’t even feel comfortable traveling more - even though that’s exactly what I said I would do if I had expendable income.

Even worse, I was still only placing this extra cash into a regular savings account. I wasn’t clueless about where else I could put it, but my anxiety wanted savings to be liquid in case something catastrophic happened. (Nothing catastrophic ever warranted having such a massive cushion.) It was becoming clear. I needed a better, more logical plan.

Knowing how to manage extra money is just as important as knowing how to manage minimal money. In fact, it’s the added responsibility that comes with having such a comfortable “problem.”

Most financial advice for the masses centers around what to do to make your dollars stretch. But with Millennials pushing off expensive life steps like buying a home, some are faced with another decision: how to make their “extra money” work for them.

If you’re wondering how to put your dollars to work, you’ve come to the right place.

Start with the Basics

You’re covering your bills and you seem to magically have extra money left over at the end of every month. But are you covering those necessities that might not seem as pressing as rent and food? Start with these basics before assigning another job to those funds.

1. Emergency Fund

Finances rarely unfold in a predictable, straight line. Jobs change, unexpected health concerns arise, cars need repairs out of the blue. There are too many potential financial drains to not have an emergency fund.

There are several schools of thought around how big your emergency fund should be, ranging from 3-12 months of expenses. Determine what’s right for you by taking a few key factors into consideration:

  • How predictable is your income?
  • What are your financial responsibilities?
  • What are you comfortable with?

Someone with no kids and a job with a reliable income might be fine with a three-month cushion. A freelancer with kids and a mortgage would likely be better off with a 9-12 month cushion.

This is one instance in which I allow my money anxiety to have a say in the matter. I might not need a full 12 months worth of expenses sitting in my bank account, but I feel more empowered to take risks in my business if I know I have that to fall back on.

2. Retirement Contributions

When I was saving money after landing my first job post-college, I made one big mistake: I didn't funnel that money towards my retirement first. When I was schooled on how much less I would need to contribute if I started early, plus how much more that money would grow, I immediately regretted that decision. (Not convinced? Check this out.)

Here’s the thing: you’re never too young to start saving for retirement. Age might sound like a legitimate excuse, but you’re only cheating your future self out of a stress-free financial life. If the word “retirement” doesn’t inspire you, try renaming it your freedom fund instead.

If your company offers a match, you should at least contribute enough to receive the full amount, but that’s often not enough. What you should be saving for retirement depends on a few key factors:

  • The number of years until you retire
  • How much income you will need to replace in retirement
  • Your estimated living expenses in retirement
  • The number of years you will potentially be retired

Sound complicated? Read this.

Think About Your Next Five to Ten Years

Life - just like finances - can take a quick turn without any warning. You might be a bachelor living the single life now, but on the path to marriage in six months. Or, you could be living in a rental you love, but faced with a killer deal on a home purchase in two months. You might not know your timeline for these big life events, but extra money offers something great: the ability to move full speed ahead when an opportunity presents itself.

When I decided I wanted to purchase and remodel the townhome I was renting, there was one thing that made the entire process smoother: cash. I didn’t need to wonder where the money for the remodel would come from or how I could scrounge up enough for a down payment. I had successfully saved for both - before I even knew what I was saving for.

Some of the biggest money drains can happen in quick succession of each other: marriage, babies, buying home. Without savings, the timeline for these events can be severely impacted.

So where should you start putting that money you’re saving for these events? That depends on when you might need to access the funds. Here are some examples:

  • Less than two years: high-yield savings account or a money market account
  • 2-3 years: short-term bond funds
  • 3-5 years: CDs or peer-to-peer loans

Services like robo-advisors can also help you create a suitable investment strategy for your money by de-risking your portfolio as you reach the date you set for your goal.

Whatever savings vehicle you choose, think of it as a choice fund. You’re giving yourself the choice to buy your dream home if it hits the market next year. You’re giving yourself the choice to propose if you’re with the girl of your dreams in two years. You’re giving yourself the choice to have a child stress-free when you feel the timing is right.

Get Rid of That Debt

According to a 2015 Pew study, a staggering 80% of Americans have debt of some kind. Seventy percent said debt was a necessity in their lives.

But while debt may be a societal norm, that doesn’t mean it has to be the norm for you.

Here are a few things to keep in mind if you have debt but also have extra money to play with.

1. Tackle High-Interest Debt Immediately

If you have high-interest debt - like a credit card balance with a rate of 22% - then it’s time to buckle down and get to work. In many cases slaying this debt should take precedence over saving. Why? Because the chance of your dollars growing enough in interest or earnings to offset that monthly loss to interest is slim to none.

2. Consider Your Total Debt and Savings Picture

Debt sitting at an interest rate below 5% should be thought of holistically with your current savings progress and earning potential. If you're averaging 8% returns on your investments, then funneling that money towards debt payoff may not be the best option. However, if you’re fully meeting or exceeding your savings goals, then why not give yourself the additional peace of mind offered by total debt freedom?

Think About Your Net Worth

If you have $25,000 in savings but $15,000 worth of credit card debt, your net worth is $10,000. This number would be the same regardless of if you left the debt in tact, or took $15,000 in savings and paid it in full. However, the second option would mean a significant saving in interest - now and into the future.

Your financial picture might not always look as rosy as it does now. By getting rid of as much debt as possible when you’re in the black, you’re ensuring it doesn’t snowball out of control if you hit a rocky patch down the road.

Say it with Me: Priorities, Priorities, Priorities

Having extra money comes with a huge responsibility - determining what your priorities are. If you are barely scraping by, mapping out your dream life doesn’t seem as pressing. But when you have money that extends beyond your needs, it’s absolutely necessary to think bigger and decide what matters to you.

What priorities drive your life? What do you need to make a priority that isn’t currently? What do you want your life to look like in two years? Five years? If you fully understand what is important to you, giving your money a job becomes easier. If you create a plan that takes what is important to you into consideration, sticking to the plan never feels like a question.

When I first launched my business one year ago, I pinpointed “freedom” as one of my core values. While I continue to keep this at the forefront of all business decisions, it also has a place in my money decisions. I know if I use extra money to further support and uphold “freedom,” I’m on the right track. This might mean saving for a trip to take when the mood strikes or working to shave a few years off of my target retirement date - anything that makes me feel as if no one is controlling my life but me.

Having the ability to choose where your money goes - beyond shelter and food - is a great place to be in. Take advantage and get clear about how to drive your life in a direction you’re excited about!

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