Whether it’s an end-of-year bonus, a tax refund or some other form of unexpected money—the arrival of extra income feels great. However, don’t be tempted to run out and spend that money immediately. When used smartly, extra income can be the difference between financial health and financial hurt. Here’s a guide on how to smartly allocate your extra income.
The very best thing you can do for your financial wellbeing is to pay off credit card debt as quickly as possible. Every month your debt goes unpaid, you’re just accruing more of it—putting a dent in your current and future bank balance, and making it more difficult to take advantage of premium financial products. Wherever possible, use any unexpected income to pay down personal debt.
On the other hand, if you’re gradually paying off a student loan or mortgage, you might use that extra income to make an extra loan payment. Talk to your lender about the mechanics of making an extra payment, which can shorten the term of your loan and help you pay less interest in the long run.
Look ahead to the next few months. What household expenses are on the horizon? Consider winter heating costs, upcoming car repairs, or any special occasions which might require a trip to the mall. By setting aside money now, you’ll be protecting yourself from future financial woes or possibly even a mountain of credit card debt.
You’ll never regret adding extra money to your emergency savings account. Experts recommend maintaining an emergency fund that can cover three to six months of household expenses and which is liquid—so you can access your money immediately if the need arises. If you’ve been waiting for the right time to start an emergency account or add a bit more cash, take the arrival of unexpected money as a sign to build your emergency fund.
However, if your emergency savings account is in good shape, you could use that extra money to save for a different purpose. Whether it’s a vacation, a new car or next year’s holiday shopping, choosing a target and saving money in a designated account is a smart way to achieve your financial goals faster. If you’ve already got a purpose in mind, check out Harvard FCU’s Club Savings Account, which is designed to help save for specific expenses.
No matter your age, it’s always a good time to save for retirement. If you don’t already have an Individual Retirement Account (IRA), make it a priority to open one. IRAs and Roth IRAs enable you to save for retirement with tax advantages, either when depositing or withdrawing your funds. Consider using any extra income to max out your yearly IRA contribution, which is $7,000 in 2024. Remember: the more money you can save in your IRA, the more funds you’ll have on retirement and the most tax advantages you’ll receive.
Utilizing a tax-advantaged retirement account is one of the smartest ways to invest for the future. But, if you’ve already maxed out your retirement savings for the year or if you’re looking for a shorter-term investment vehicle, there are plenty of options. A Certificate of Deposit, or CD, offers a fixed rate of return for a fixed period of time. You can’t touch your money while it’s in a CD, but you will earn more interest than you would with a traditional savings account.