You cut back on how much you spend – you shopped on sale and skipped the proverbial coffee run. Awesome! But then what? What do you do with the extra money you’ve saved?
Create a plan for what to do with any extra money
Without a plan for the extra money saved, you run a higher risk of spending your savings on other things. While this isn’t necessarily a bad thing, it can shift you off track when you’re trying to create a more secure foundation.
Plus, having a plan for your savings can make saving more fun. Really!
Knowing is half the battle – figure out how much you’re saving
Before you can plan what to do with your excess money, you first need to know how much you’re saving. For example, if you typically spend $200 at the grocery store each week, it’s realistic that shopping a little smarter could save you about 30%, if not more – which in this example is $60.
This means that, at the end of that week, you should have $60 more than you typically would.
This math can be applied to every way you use to save money. Once you figure this out, it’s easier to plan what to do with extra cash.
There are many, many options to invest your money, but let’s discuss some ideas of where to start before getting too fancy:
Create an emergency fund
Even if you have debt, an emergency fund is super important. It can be the difference between having money set aside to pay for an emergency or taking out debt to cover an emergency.
Small emergencies are most common – think a $300 car repair bill. And an emergency fund is the safety net that can help keep your debt from growing or keep you from getting into debt in the first place.
Your emergency fund should be stashed in a safe place where it’s easy to get to. Not under the bed, but in a bank or credit union. Ideally, one where you have an ATM card for so you can get cash out quick in case of an emergency.
I keep my first $1,000 in a bank with branches near my house and the rest in an online account.
Save for retirement by investing
Making a point to save for retirement is important. Think of it this way, if it’s hard to find money to save for retirement now, imagine how hard it’ll be when you can’t work.
Even if it seems like centuries away, you should be saving for it. The earlier you can start the better. Compounding will be your BFF.
Especially if your employer offers a match on your retirement savings! That’s free money! And free money should never be passed up.
If it’s still hard to prioritize this over debt, think of investing for your future as a debt to yourself as opposed to a debt to someone else.
Unless you carry super high-interest debt, investing for retirement should come before that, since the average gain over the decades will likely be more than the savings from paying off low-interest debt early.
But how much to save??? My two cents on this is to save what you can. The ideal is to save at least 10% of what you make, but, if you can’t do that, then something is always better than nothing. And you can always increase how much you save over time.
Pay down debt
Once you have a safety net, in the form of an emergency fund, and you’ve started saving for your future, it’s time to tackle debt.
Mathematically, paying off the highest interest debt first is the most effective and best use for your money.
But paying down the smaller debts first can give you a great rush and motivate you as they get paid off.
In the end, either way will get the job done. Don’t sweat the details and just pick the one that’s best for your personality.
Save for your kids’ college
If you have kids, you’re likely stressed over the cost of higher education. But, this should come after you’ve started saving for your own retirement. There are scholarships, grants, part-time work, employer reimbursements and other ways to help pay for college. What there are not are scholarships to pay for retirement.
Again, if it’s difficult to save for retirement now, think how hard it will be if you’re unable to work.
If you expect your child to go to college or vocational school and you’re able to set aside money for them, a 529 plan is a great option. It works similarly to a retirement account. They’re tax-friendly investment accounts that can only be used for expenses at an accredited college or vocational school.