People who are used to living paycheck to paycheck may have a hard time figuring out what to do with leftover cash once debts are finally paid. Instead of forking over $300 a month toward that auto loan, for example, you’re left with 300 extra dollars each month and are probably more tempted to blow it than save it.
Take time to congratulate yourself for paying off even one debt. Whether you use the excess money to pay down more debts or invest it in savings, feel good about your accomplishment.
Paying off any one debt can be a tremendous relief, but you shouldn’t feel like you can carelessly spend the extra cash you save from no longer having payments. Investing the extra cash flow doesn’t have to be complicated and you don’t even have to research how to be an investor.
Most Americans are too strapped for cash to build up an emergency savings fund. Once you begin to have a little extra money each month, start putting the amount you would have spent on making a payment into savings.
Check with your employer about direct deposit options that would allow you to funnel that extra $300 a month into savings. You can do this by breaking down the excess based on how much you get paid.
If you see a paycheck twice a month, have $150 deposited directly into savings automatically. Setting up this type of automatic savings ensures that you don’t even see the money, which allows you to save effortlessly. After only a year of doing this, you will have saved $3,600 in savings and that doesn’t even include interest.
Although interest rates for savings accounts have taken a hit with the economy, they still earn more interest than a checking account. If you plan on committing to this savings plan long-term, do your research and compare savings accounts first. Shop around for bank accounts to see which ones offer higher interest rates. You will probably find that online banks and credit unions offer slightly higher yields than most financial institutions.
Another option is to open a specialized saving account such as a money market account or CD. Money market accounts require a higher minimum balance, however, so you may need to save for a while in your regular savings account before opening a money market fund. CDs also have minimum balance requirements with the added restriction of a time commitment. Once you open a CD, you agree to keep your money in the account until its maturity.
Aside from investing, another great way to spend that excess money is to focus on paying down other debts. Take that extra $300 and put it toward your credit card, student loan debt or mortgage. Paying interest isn’t fun and it should be your goal to pay off your loans as soon as possible.
If you realize that it’s going to take longer than you’d like to pay down the remainder of your debts, consider refinancing your loan. Refinancing may lower your interest rates, which saves you money in the long run.
What have you been able to do with you extra cash?