It’s a rare moment when you find yourself with a little extra money these days isn’t it? You may have sold a few things online or picked up a number of side hustles and found yourself with some extra cash in your budget. Now, what to do? You want to be smart about it, so you don’t end up regretting your decision in the end. If you don’t have a financial advisor to consult, someone like My Wealth Solutions or one of the others out there, here are five things to consider that might help you make your decision.
Are You Carrying Bad Debt?
Bad debt is any debt that is not attached to an asset. A mortgage for example, is secured by property that has relative value. This is why it is considered ‘good debt’. Credit card debt, secured by nothing more than buying stuff you’re still paying off from Christmas 2013, is bad debt.
Credit card debt should be killed as fast as possible. The interest charges alone are enough to keep you from increasing your net worth until it’s paid off. If funneling your windfall in this direction frees your from the credit card debt treadmill, it really is an investment of sorts; in your financial stability as much as in your peace of mind.
Consider The Returns
This one is about simple mathematics. If you have a mortgage, and you’re paying an interest rate of, say 5%, and you put your spare funds into your loan, your return is what you’re saving in interest; i.e. 5%, and with no tax liability to speak of. However, if you invest your money, will your return be greater than 5%? Even after you’ve been taxed on it (tax counts)? Unless you really want to scroll the tax department websites yourself, these are questions you may want to ask your financial advisor – and remember to ask about the tax. Tax rates are ever changing. Investing in someone else to keep track of these shifting sands for you is a major headache-saver.
Long, Medium or Short Term Goals?
Consider which of your goals you’d like to make the largest leap towards. That will help you decide how and where to place your money. Perhaps you have a long-term goal of buying a home; in that case, you may be best served in putting your funds towards this. If you have a short-term focus of taking an overseas vacation in a few months, you can place the funds in that direction. It depends on your focus and how your money can best serve you.
Check Your Budget
If you have a budget or any kind of savings plan, check your progress. Have you had any unplanned expenses lately? Are there any holes that need to be plugged? How urgent are they? Looking at your finances regularly helps improve your financial intelligence, and you’ll soon find it easier to make smarter decisions about your money.
Never forget that every investment carries an inherent amount of risk, no matter how small. This is not the case with paying down debt. Consider where you’re at and what’s going on for you. If you think you really don’t want to be stressing about a new deal right now, then paying down your debt may just be the most effective investment you can make – and there’s nothing wrong with doing something safe and sensible every now and again. Especially when it comes to money.
If you’ve scored a bonus at work, or your tax return just came through, you may be wondering what you can do with your windfall. There are really only ever two options for what you could do with spare cash; invest it somehow, or pay down debt.
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