Some are making more money than before from extra hours or increased unemployment benefits. If you’re lucky enough to be making a little extra, here’s what you can do to better prepare yourself for the coming months.
The Normal Route Doesn’t Apply
Usually, when you make more money, get a bonus, or receive a tax refund, you can follow this guide:
- Build a small emergency fund
- Pay off high-rate debt
- Build a full emergency fund
- Increase long-term investments
- Pay off low-rate debt
- Increase investments more
Since we’re already in an emergency, there may be a better route.
Save Big (If You Can)
The first step is generally building a mini emergency fund of up to $1,000. Right now, try to go bigger and skip the “mini” part, if you can. Typically, an emergency fund is three to six months’ worth of living expenses. If you can save more, great, but build what you can.
There’s no guarantee that your increased income will last in the weeks to come. And if your extra income isn’t secure, the savings can help you cover the necessities—food, shelter, transportation, and utilities—in case you lose your income or have to take care of a family member.
Be Strategic About Paying Down High-Rate Debts
High-rate debts are generally classified as debts that have an interest rate above 10%. Credit cards may fall into this category, as well as some personal and auto loans. Payday, pawn, and title loans often charge high fee 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 a bill from your monthly list.
However, 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 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 loan, or choosing a longer term, can save you money and lower your monthly payments. Refinancing credit card debt with a personal loan can also improve your credit scores.
Take Advantage of Sales
Many stores are struggling because of the coronavirus. While you shouldn’t overspend, it may be a good time to invest in durable products and assets.
If you need a new computer or to work on your home, it may be a good time to go deal hunting. It may also be a good time to save for a larger investment, such as a home or rental property.
With low interest rates, it may be easier to buy a home in the next few years. If you’re able, this may be a good time to set money aside for the down payment.
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 your financial situation and 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 financial stress.