If you’re making more money right now, here’s what to do
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Finding you have some money to spare each month? Whether you’re earning cash from a side hustle, banking overtime hours, getting a bonus, or receiving an annual tax refund, it’s important to make sure you’re maximizing what you can do with it. That rings especially true if that extra money coming in right now isn’t something you count on moving forward.
If you’re lucky enough to be making a little extra, here’s what to keep in mind when determining what to do with your money to spare.
Save money if you can
If you don’t already have an emergency fund, this is a good place to start. Whether it’s an accident or illness, an unanticipated home repair, or the sudden loss of your job, having an emergency fund ready to go can help you avoid a devastating blow to your cash flow or credit in the future.
There’s no guarantee that your increased income will last in the weeks to come. And if your extra income isn’t secure, these savings can help you cover the necessities—food, shelter, transportation, and utilities. As a general rule, aim for enough to cover at least 3 to 6 months’ worth of expenses.
Even if you already have a solid emergency fund in place, consider whether saving the money for something else makes sense, especially if you can get a higher rate of return on it. Want to reach your savings goals faster? A Varo Savings Account offers a high annual percentage yield (APY), no fees, and easy auto-saving tools to help you grow your money.
Be strategic about paying down high-rate debts
High-rate debts are generally classified as those with an interest rate above 10%. Credit cards often fall into this category, as well as some personal and auto loans. Payday, pawn, and title loans also often charge high fees and interest rates.
Generally, when you’re making more money, you want to focus on these debts first to save the most money in the long run. Because these debts have such high interest rates, even a small debt can grow quickly.
However, making early payments doesn’t necessarily decrease your monthly bill, which can make the decision more difficult right now. For example, if you have an auto loan with a 12% interest rate and you owe $2,000, you may want to focus on paying off the loan early, saving a little interest, and striking one bill from your monthly list.
But, if you still owe $10,000, you could be making payments for years. Paying extra now might decrease how much interest you pay in the long run, but it’s all for nothing if you can’t afford your payments in a few months and your vehicle is repossessed.
If you’ve already built your emergency fund and want to make extra debt payments, consider a staggered approach. Rather than making extra monthly payments, some people build up several months’ worth of payments and then send the extra amount to their creditor.
Try to refinance high-rate debts
Lenders’ requirements are getting stricter, but they’re always looking for new customers to recoup the money they lose when people can’t make their payments.
If a new job or promotion led to your increased income, and you have good credit, look into refinancing your high-rate debt with a new, lower-rate loan.
Refinancing with a lower rate or longer term loan can save you money and decrease your monthly payments. Refinancing credit card debt with a personal loan could also improve your credit score.
Take advantage of sales
While you shouldn’t overspend, having some extra cash on hand may create a good opportunity to invest in durable products and assets.
If you need a new computer or home appliance, it may be a good time to go deal hunting for a quality product that will last you for years. Likewise, depending on the level of your financial windfall, it may also be smart to consider saving for or putting it toward a larger investment, such as a home or rental property. But, make sure to consider current interest rates, and whether they’re anticipated to go down in the near future.
Be mindful of your cash flow
The debate about when to save and when to invest is an ongoing one, and the correct answer always depends on both your financial situation and your personal preferences. Right now, it may make sense to take an adjusted approach. Rather than minimizing all your expenses, you may want to focus on your cash flow—how your income compares to your expenses—and having liquid savings available to ease any financial stress.
Having some extra cash on hand right now presents the perfect opportunity to take a hard look at how you can improve your current and future finances. If you can get into the habit of optimizing any unexpected increase in earnings, you can set yourself up to make smarter decisions moving forward, especially ones that will help you achieve a longer term financial goal.
Unless otherwise noted above, opinions, advice, services, or other information or content expressed or contributed by customers or non-Varo contributors do not necessarily state or reflect those of Varo Bank, N.A. Member FDIC (“Bank”). Bank is not responsible for the accuracy of any content provided by author(s) or contributor(s) other than Varo.
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