Smart Money Moves: What to Do With Extra Cash to Financially Improve Your Life
May 21, 2022
Receiving extra cash can be a great feeling, but it can also be tricky to figure out how to use it effectively. Whether you’ve received a bonus at work, an inheritance, or some other type of windfall, it’s important to make smart money moves with it. Investing in your financial future can help you achieve your long-term goals and improve your overall quality of life. In this post, we’ll provide you with some tips on how to best use your extra cash to financially improve your life.
From paying off debt and investing in your retirement, to building an emergency fund and pursuing new opportunities, I’ll cover all the bases to help you maximize your financial potential. So whether you’re looking to build your wealth or simply make your money work harder for you, read on for some smart money moves to improve your financial situation.
1. Introduction: why it’s important to make smart money moves
Making smart money moves is crucial to achieving financial stability and success in life. Whether you have just received a bonus at work, a tax refund, or you’ve been saving for years, having extra cash on hand can be a great opportunity to improve your financial situation.
But, the way you handle your money can make a big difference in your financial well-being. By making smart money moves, you can avoid debt, build wealth and achieve financial freedom. However, the challenge is knowing what to do with the extra cash. Should you pay off debt, save it, or invest it? It’s important to make sure you are making the most out of your money, and this guide will help you to make informed decisions about your financial future. So, let’s explore some smart money moves that can help you to reach your financial goals.
2. Pay off high-interest debt
If you have extra cash, one of the smartest money moves you can make is to pay off high-interest debt. Why? Because high-interest debt can quickly spiral out of control and become a financial burden that’s hard to shake off. Credit card debt, payday loans, and personal loans are just a few examples of high-interest debt that can quickly add up if not paid off in time.
By paying off high-interest debt, you’ll not only save yourself money in interest payments but also improve your credit score. A good credit score is important if you plan to buy a house, a car, or even apply for a loan in the future. Creditors look at your credit score to determine how risky you are as a borrower. The higher your credit score, the more likely you are to get approved for a loan and receive lower interest rates.
So, if you have extra cash, consider putting it towards your high-interest debt. Start with the debt that has the highest interest rate first and work your way down. This is known as the debt avalanche method. Alternatively, you can choose to pay off the smallest debt first and work your way up. This is known as the debt snowball method. Both methods have their pros and cons, so choose the one that works best for you and your financial situation. Either way, paying off high-interest debt is a smart money move that can improve your financial life in the long run.
3. Build an emergency fund
One of the most important things you can do with extra cash is to build an emergency fund. Life is unpredictable and unexpected expenses can pop up at any time. Whether it’s a health emergency, car repairs, or even job loss, having an emergency fund can provide you with a much-needed safety net.
Experts recommend having at least three to six months’ worth of living expenses saved up in an emergency fund. This may seem like a daunting task, but it’s important to start small and be consistent in your savings efforts.
A good strategy is to set up a separate savings account specifically for your emergency fund. This will help prevent you from dipping into it for non-emergency expenses. You can set up automatic transfers each month from your checking account to your emergency fund savings account so that you don’t even have to think about it.
Another tip is to prioritize your emergency fund savings over other non-essential expenses. For example, consider cutting back on dining out or entertainment expenses to redirect that money towards your emergency fund.
Building an emergency fund may not be the most exciting way to use your extra cash, but it can provide you with much-needed peace of mind and financial security.
4. Contribute to a retirement account
Contributing to a retirement account is one of the smartest things you can do with extra cash. It’s a long-term investment that will pay off in the future. There are a variety of retirement accounts available, such as a 401(k), IRA, or Roth IRA. Each has its own benefits and restrictions, so it’s important to do your research and choose the one that’s right for you.
A 401(k) is an employer-sponsored retirement account. It allows you to contribute pre-tax dollars, which reduces your taxable income for the year. Many employers offer matching contributions up to a certain percentage, which is essentially free money. The downside is that there are limits to how much you can contribute each year, and you’ll be penalized if you withdraw the money before age 59 ½.
An IRA (Individual Retirement Account) is a retirement account that you can open on your own. Contributions are made with post-tax dollars, but you may be able to deduct them from your taxable income. There are no restrictions on who can open an IRA, but there are limits to how much you can contribute each year. The money grows tax-free until you withdraw it, and you won’t be penalized if you withdraw it after age 59 ½.
A Roth IRA is similar to a traditional IRA, but contributions are made with post-tax dollars. The money grows tax-free, and you won’t be taxed on it when you withdraw it after age 59 ½. There are income limits on who can contribute to a Roth IRA, but if you’re eligible, it can be a great way to save for retirement.
No matter which retirement account you choose, contributing to it regularly can help you build a nest egg for the future. It’s never too early (or too late) to start saving for retirement, so take advantage of any extra cash you have and contribute to your retirement account.
5. Invest in stocks or mutual funds
Investing in stocks or mutual funds can be a great way to make your extra cash work for you. However, it’s important to do your research and understand the risks involved before diving in.
If you’re new to investing, consider starting with mutual funds.
These are managed by professionals and invest in a diversified portfolio of stocks and bonds, which can help spread out the risk. A good rule of thumb is to invest in a mix of domestic and international funds to further diversify your portfolio.
On the other hand, if you have more experience and are willing to take on more risk, individual stocks can potentially provide higher returns. However, it’s important to do your due diligence and thoroughly research the companies before investing. Look at their financials, growth potential, and competitive landscape to make informed decisions.
Remember to also keep an eye on your investments and regularly review your portfolio to make sure it aligns with your financial goals and risk tolerance. With careful consideration and a long-term mindset, investing in stocks or mutual funds can help improve your financial wellbeing and provide a path towards long-term wealth.
6. Save for a down payment on a house
Saving for a down payment on a house is a smart money move that can financially improve your life in the long term. While it may seem daunting to save up for a large sum of money, it is an achievable goal with the right planning and a bit of patience.
To start, determine how much you need to save for a down payment. The amount will vary based on the price of the house you are interested in and the percentage of the down payment required by the lender. A common rule of thumb is to aim for a 20% down payment to avoid paying private mortgage insurance (PMI).
Next, set up a dedicated savings account for your down payment fund. This will help you keep track of your progress and ensure that the money is not used for other purposes. Consider setting up automatic contributions to the account each month to make saving a habit.
In addition, look for ways to increase your savings. This could include cutting back on expenses, finding ways to earn extra income, or both. Consider using windfalls such as tax refunds or bonuses to boost your down payment fund.
Finally, be patient and stay focused on your goal. Saving for a down payment may take time, but the reward of owning a home can be well worth the effort. By following these steps, you can make a smart money move that will financially improve your life in the long term.
7. Save for a child’s education
One of the best ways to invest extra cash and financially improve your life is by saving for a child’s education. The cost of higher education is rising year after year, and it’s becoming increasingly difficult for students to pay for their education without taking on a large amount of student loan debt. By saving for your child’s education, you can help them avoid this debt and give them a head start in their career.
There are several ways to save for a child’s education, including 529 college savings plans, Coverdell Education Savings Accounts, and custodial accounts. Each of these options has its own set of rules and benefits, so it’s important to do your research and choose the one that’s right for you and your child.
529 college savings plans are tax-advantaged accounts that are specifically designed to help families save for college. These plans offer a variety of investment options, and the earnings grow tax-free as long as they are used for qualified education expenses. Coverdell Education Savings Accounts are similar to 529 plans, but they can be used for both K-12 and higher education expenses. Custodial accounts, on the other hand, are accounts that are set up for a child and managed by an adult until the child reaches a certain age.
No matter which option you choose, saving for your child’s education is a smart money move that can have a big impact on their future financial success.
8. Consider starting a side hustle or business venture
If you have some extra cash and are looking for a way to improve your financial situation, starting a side hustle or business venture might be a great option for you. This is a great way to create additional income streams and diversify your sources of revenue. Plus, with the rise of the gig economy and e-commerce, starting a side hustle or business venture has become more accessible than ever before.
Starting a side hustle or business venture can also provide you with a sense of fulfillment and purpose. You can turn your passions and interests into a money-making venture and be your own boss. However, it’s important to do your due diligence and research before jumping into any business venture. Make sure you have a solid business plan and understand the market, competition, and potential risks involved.
Starting a side hustle or business venture doesn’t have to be a full-time commitment either. You can start small, with just a few hours a week, and gradually build your business over time. Some popular side hustle ideas include freelancing, tutoring, pet-sitting, or starting an e-commerce shop. The key is to find something that aligns with your skills and interests and has the potential to generate income.
Overall, starting a side hustle or business venture can be a smart financial move that can improve your life in many ways. It can provide you with additional income, a sense of purpose, and the opportunity to pursue your passions. Just make sure you do your research and have a solid plan in place before diving in.
9. Upgrade to a better living situation
If you find yourself in a good financial position, one of the smartest moves is to invest in your living situation. Upgrading your home or apartment can have a significant impact on both your quality of life and your financial well-being.
For homeowners, investing in home improvements can increase the value of your property, making it a smart long-term investment. Whether it’s adding a new room, updating outdated features like an old kitchen or bathroom, or investing in energy-efficient upgrades, the right home improvements can not only make your home more comfortable but also increase its resale value.
If you’re renting, consider upgrading to a nicer apartment or house in a better location. While this may mean higher monthly rent payments, it can also improve your quality of life, reduce your commute time, and provide access to better amenities like a gym or pool.
However, it’s important to ensure that you can comfortably afford the upgrade without putting yourself in a precarious financial position. Consider the long-term financial impact of the upgrade, including the potential for higher monthly payments, maintenance costs, and other expenses associated with the new living situation.
Overall, upgrading your living situation can be a smart financial move if done responsibly and with a long-term perspective. It can improve your daily life and potentially increase your net worth in the future.