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What should you do with EXTRA money??

Written by Rachelle Vanderzanden

For our readers who are still in training, you may be seeing another gift from Uncle Sam-soon.  Or maybe you already have!  These are crazy times, economically and personally.  But even in crazy times, good things can happen.   What do we do if those good things come in the form of “extra” money?  A stimulus check, a bonus you didn’t think you would qualify for, or maybe even an unexpected inheritance.  Do you pay down debt?  Do you spend it?  Do you save?

The best use of a dollar is not the same for everyone, but below are a few actions you can take to better your own financial situation or even someone else’s when unexpected cash heads your way.


Pay Off Credit Cards


Ideally, we can utilize resources as efficiently as possible to help meet our goals.  That often means taking care of the boring stuff first.   You can’t get much more boring than paying off credit cards, but with interest rates that often push 20-25% or more, paying them off has a huge impact on your financial plan.  If you put $1,000 toward a card accruing 25% interest, you just saved yourself $250 over the course of a year.  Boring, but effective.

Other high-interest rate debts like personal loans and private student loans can also be a good place to put extra cash flow.  Get very familiar with your debts and their interest rates to help you make a good decision regarding where to start.  Look at any debts and credit cards that are accruing interest at a rate above 7%, find the one with the highest interest rate, and put the extra money toward that card or debt.  Keep in mind that this strategy may not be appropriate for your student loans depending on your situation.  For example, if you have federal loans that are in Administrative Forbearance and not accruing interest, you may not want to make extra payments right now, and if you’re working toward Public Service Loan Forgiveness, the goal is generally to pay as little as possible.

 

Bolster Emergency Funds


If you have no high-interest debt, my next suggestion would be to build up your rainy-day fund a little bit.  Ask yourself, could I/we make it for at least three months if we had no income?  Could we pay our bills and still eat?  If the answer is no, set aside that money in a savings account and let it sit there.  You didn’t think it could get more boring than paying off your credit cards, but I just proved that it could.  You’re welcome.  If you do have three months set aside, let’s put a little more aside.  If this pandemic has proved anything, it is that job security is not always what we assume it is.  If you haven’t already, you can also explore setting up an online “high” interest savings account for your rainy-day fund.  The interest rates are low right now but still much better than most brick-and-mortar banks.

 

Top Off Retirement Savings

Have you made your 2020 Roth IRA contributions?  Can you?   If you can save more, then now is the time.  We cannot predict the market, but we do know that the more time you have in the market, the better.  If you are eligible, you can make Roth IRA contributions for 2020 up until April 15, 2021.   There are income restrictions on these accounts, but even some high-income earners can indirectly contribute these accounts through the “back door” Roth IRA strategy.

If you’re maxing out your plan at work and a Roth IRA, you can also look into setting up an additional investment account or saving more into your existing account.  For folks in training, the goal is to save as much as you can early.  For attendings, we generally recommend savings at least 20% of your income for retirement.  When you’re spending an extended period of time in training, you're often left playing catch up when you start earning attending income.  A lot of people need to save more to reach their goals.

But what if you are on track to meet your goals and have more than you need?


Treat Yo Self

Have you had your eye on something special for a little while?  Maybe for yourself, or maybe for that special someone (hint hint)?  With a little extra cash in hand, now might be a good time to splurge a tiny bit.  Treat Yo Self!  The stimulus money is designed to help the economy.  Large purchases can have an outsized impact on small businesses, and many are struggling through this whole pandemic thing.  Jeff Bezos has enough, but buying bikes from your local bike shop or that ring you’ve been admiring at your local antique store may have a huge impact on their business.  I see this as a win-win.

The travel industry has also taken a huge hit over the past year.  Even if you’re not ready to take a trip quite yet, you may want to set a little aside for that epic vacation you’ve been daydreaming about since approximately March 11, 2020.  Experiences can often be much more satisfying than things.  

Give It Away

If you have a more philanthropic nature, consider giving it away.  I’m not suggesting you have the resources that Mackenzie Scott has, but she spent a lot of time trying to thoughtfully give away a large portion of her assets this year.  She has enough.  Others don’t.   Sometimes it is hard to decide where to start, but think of an issue that you care about and start there.  With so many kids out of school, food insecurity has been a huge issue this past year.  Live performance arts have taken a huge hit.  If you love the opera, the ballet, or the symphony, consider purchasing a subscription for this coming year.  Something for you and them!

Take all of this with a grain of salt.  No one can be disciplined and robotic with their finances all the time.  If you’ve taken a big chunk out of those credit cards already this year, and you want to go on a trip post-quarantine, maybe that’s the best answer for you.  Ultimately, you have to decide for yourself!