Coming into a little extra money, whether through a tax refund (short-term) or a raise (longer-term), feels amazing. The flexibility that comes from having an expanded cash flow can be wildly liberating. To make that feeling last beyond the initial euphoria, look for bigger opportunities to use the new $$$ to your advantage.
building blocks of financial security include paying down high-interest debt and growing your emergency fund. So if you haven't already done so, you might put that extra $1,000 toward making a dent on the principle of any outstanding debts with interest rates greater than 5%.
"I use 5% as a dividing line because debt lower than that tends to be either mortgage debt or really low government student loans," says Manisha Thakor the director of wealth strategies for women at
Buckingham Strategic Wealth and the BAM Alliance.
Been there and done that? Then she advises putting your new surplus into your emergency fund until your nest egg is up to $2,000, or more. "The rule of thumb is to try and save three-to-six months of living expenses. That is a perfect
long-term goal, but in your 20s in particular, it's the rare person who's going to be able to save that much right out of the gate. This is a good place to start."
Once you clear those hurdles, you should start thinking
even bigger. Read on for 6 next-level money goals.
This might sound counterintuitive, but if you already have a decent emergency fund established, a traditional savings account is
not the best place to put any excess cash, especially in today's low-interest rate environment, says Chrissy Celaya, a certified financial planner at Betterment. "Instead, consider investing the extra $1,000 in low-cost index funds for the future. Even if your principle goes down when markets are not doing well in the short-term, properly investing your money [can] mean expected growth over the long term," she says. Not keen on taking the reigns yourself? Celaya suggests looking into robo-advisors to invest for you. Companies like Betterment, Wealthfront, and Ellevest are growing in popularity, in large part because of their lower fees, digital-first platforms, and ability to consult with real-live advisors if you do get stuck. NerdWallet has reviews of the major players, so you can choose the platform that's right for you.
If you have a beer-budget retirement fund on a champagne income, kick things up a notch. Investing some money into your retirement fund is better than nothing, of course, but the parameters you set when you first opened the account (back when you were making a smaller salary) should change as your income grows. Beef up you barebones reserve once you have more money to spare.
"Go to your HR department and increase whatever rate you are currently saving at by 1%," suggests Thakor. "Maybe you could only start at 3%, then the next year you increase it to 4%, and then 5%. If you keep doing it until you reach the max; the impact is stunning."
In the years since the Great Recession, the amount of money that young people are saving for retirement has been
under a microscope. If you want to look beyond employer-sponsored plans like 401(k)s and 403(b)s, Celaya suggests contributing to a traditional or Roth IRA. "Depending on your specific situation, the tax advantages associated with each IRA type can mean a significant increase in your real return, after-tax, overtime," she explains. "Traditional IRAs can potentially lower your tax bill today, while Roth IRAs provide the opportunity for significant tax-free growth overtime." Try using Betterment's comparison calculator to decide which accounts (or combination of them) might be best for you.
Women tend to be less aggressive when it comes to investing, which can mean that their returns on the market are smaller. Once you have some disposable income to play with, consider meeting with an advisor (someone who has made a fiduciary
commitment to look after your best interests is) to start investing. "Extra money that is not going to credit card payments should be put to work for you," says Cary Carbonaro, a certified financial planner and the author of . "Consider establishing an after-tax investment account based on how much risk you want to take." The Money Queen's Guide You want to keep in mind that investing is for the long-term, she says, so think about a 10-year horizon, at minimum, and then decide what combination of stocks (long-term assets) and bonds (which are also long-term and provide lower returns, but can fluctuate less than stocks) might be right for you. "If you are in a high-tax bracket and want to increase your income, a tax-free municipal bond account may be right for you," Carbonaro says. "The interest generated by municipal bonds is generally free from federal income tax, and if the bonds are held by an investor who resides in the state of issuance, [they may also be exempt from] state and local income taxes." Just remember the bond market can be volatile, and municipal bonds carry interest rates, inflation, credit and default risks, she adds.
health savings accounts, can be great for reducing your taxable income. So, if you have cash to spare and want to make it work harder for you, depositing it into one of these accounts can be one way to go. You'll be stashing money aside for any health detours, with the added bonus of a tax break. "HSAs are one of my favorite savings vehicles for taxes, especially for young folks, because a lot of them have high-deductible [health] plans," says Joe Boyle, an advisor and retirement coach for Voya Financial Advisors. This year, if you're single, you can contribute up to $3,400 pre-tax into your HSA up until the 2017 tax deadline in April of next year. If you hit that limit, that means you'll only pay taxes on $46,600 of your income. "The nice thing is the growth in the account is tax-deferred," Boyle adds. "So if you need to use the money for healthcare expenses, you can take the money out tax-free, giving you a triple tax break."
Looking at your life from a big-picture lens can draw a line between short-term, emergency goals and long-term, aspirations/retirement ones. But you have a whole life to live in the middle!
That middle area can include taking care of family, having children, making good on dream travel plans, buying a nice(r) car, supporting charities and causes, and more. It's totally okay — and recommended — that you plan for all of that good stuff, too, says Priya Malani, a partner at Stash Wealth. "Sit down and spend some time thinking about those mid-term goals, which [contribute to] the lifestyle you want to have," she says. You might choose to fund those dreams by investing your new cash flow so that it grows exponentially, funneling it into an entrepreneurial opportunity that gives you more independence, or saving some and knocking one goal off the list, fast. You're not a robot; it's okay to strategically enjoy the fruits of your hard work.