If you’re doing a good job managing your money, you might find yourself with some extra money left over each month - but what do you do with it?
Unfortunately, a majority of people don’t have that extra money or if they do, use it for unnecessary purchases.
Ideally, you should know how much money you’re spending in certain areas of your life to create consistent savings but even if you don’t, you can still start making smart money decisions.
Before you start throwing your hard earned savings in all these different directions, it’s smart to take a look at your overall financial situation to determine the best places for these funds.
Let's look at 3 different places for your savings to go:
If you’re saving money and have debts, it may be a good idea to start paying more towards them to save you money on interest. Take a look at which debts are “bad” debts (generally higher than 6% interest rate) and try to make more than your typical monthly payment towards those debts.
This will help save thousands of dollars in interest because you're getting rid of the highest interest rate debts first.
Once you’ve paid off one high interest debt, taking the full monthly payment from that debt and applying it to your next debt will have a compounding effect.
You may have heard the terms ‘debt snowball’ and ‘debt avalanche’ before and this tactic of paying down higher interest debts first is called the debt avalanche. The debt snowball is where you pay down the less dollar amount debts first to gain momentum and confidence to continue paying off other debts.
While both methods are effective, determining which one you are going to be able to stay consistent with will help you get going in the right direction.
Into an Emergency Fund
Another vital part of your financial life is having an emergency fund. It not only provides you safety from unexpected expenses, but the part that most people don’t realize is the mental peace of mind knowing that a stressful situation is financially covered.
A goal to aim for is to have 6 months of your monthly expenses saved into an emergency fund.
You can open another savings account at your bank and transfer money to it or you can check out high interest online savings accounts to get more interest on your money.
Long Term Investments
I know, saving for retirement is the last thing you want to do or think about.
But imagine if you had to wake up and go to your job when you’re 80 - if working your entire life isn’t part of your future goals, you’ll need to start saving for retirement. Unfortunately, this scenario is going to become reality for a lot of people as 22% of Americans have less than $5,000 in retirement savings.
If your job offers a 401k match, try to invest up to their match because your employer is giving you a 'guaranteed' return on your money.
Depending on your situation, opening a Roth IRA could be an option for you. You can take money from your paycheck after taxes and invest it into this Roth IRA account and the money you earn is going to be tax-free.
If you invested $1,000 today and it was worth $70,000 when you’re 65, you don’t have to pay taxes on that $70,000 like you would in taxable retirement accounts.
Ultimately, understanding where you're at financially will help you determine the best places for your monthly savings. There's unlimited amounts of things you can buy and do with your money, but these three avenues will help get you going in the right direction for long term financial success.
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