Save or Splurge? What to Do With Extra Money

This article is provided for informational purposes only and should not be construed as legal or investment advice. Always consult with a professional financial or investment advisor before making investment decisions.

If you’re in the enviable position of having leftover cash from your budget, you might be tempted to spend it — or you can think about what to do with extra money to help put you in a better position financially.

If you’re like most Americans, your regular expenses consume most or all of your income, leaving you in a cycle of living paycheck to paycheck. One powerful way to break free of this cycle is to start budgeting and stick to that budget. Budgeting can help you with financial planning to achieve your short-term and long-term financial goals.

If you find leftover money in your budget this month, choose one of the below options to make the most of it.

What to do with extra money

Having extra money after covering expenses in your budget can be a pleasant surprise. And it’s certainly easy to find things to spend your money on, like a fancy dinner or a quick trip. But if your goal is a better financial situation, it’s important to consider what to do with extra money. 

Your financial goals may differ, but here are some priorities for extra cash:

• Saving for emergencies

• Paying down debt, such as student loans and high-interest debt

• Saving for retirement

• Saving for other financial goals

• Rewarding yourself 

Let’s explore each topic and how to save for these goals. 

Saving for emergencies

For many people, the top priority might be setting money aside to pay for emergency expenses, including:

• Vehicle repairs

• Medical emergencies

• Pet emergencies

• Everyday living expenses if your household loses a source of income

Many Americans do not have enough savings to cover a typical emergency. Most Americans don’t have enough cash to cover a $1,000 emergency expense without a loan or credit card debt. 

Financial advisors recommend that you have at least $1,000 for emergencies. Setting aside three to six months' expenses is recommended, which may not be attainable for some households. It might make sense to pay off high-interest debt as a higher priority once a reasonable amount is saved. 

Keep emergency savings liquid and easily accessible in a checking account or savings account rather than investing. You may consider using a high-yield savings account to earn more interest. 

Got your emergency fund on lock? Move on to the next priority. 

Paying off debt

Using extra cash to tackle existing debt can reduce your debts and lower future monthly debt payments. This can create a snowball effect, freeing up more money in your budget in the coming months.

Paying off debt looks different for each household but likely means making extra payments on:

• Credit card debt

• Personal loans

• Student debt

• Car loans

• Mortgage loans

Start by paying off lenders with the highest interest rate. In many cases, this means paying off high-interest rate credit card debt first, followed by personal loans and other high-interest loans. Low-interest debt, such as mortgages and car loans, can be the next step. 

Saving for retirement

The earlier you start saving for retirement, the faster your retirement savings could grow (thanks to the magic of compound interest). If you're wondering what to do with extra money, putting more toward retirement might be a good fit.

Here are a few ways to save that extra cash:

• Contribute to your employer’s retirement system, especially if they match investments to your retirement account.

• Contribute to a Roth IRA or other personal retirement plan.

• Make another plan for funding your retirement years.

• Start a side hustle, and put that extra income away for retirement.

• Generate passive income through real estate investments, such as rental properties.

There are different expert opinions on how much you need to save for retirement, but for most of us, the answer is probably more than we currently have. Think about investing your retirement funds so that your money can start making money. 

But keep in mind, there are risks involved with investing, so be sure to talk to a financial advisor about how to save money for retirement and which tax-advantaged investments should be part of your retirement plan. They can look at the big picture and give you financial advice about what’s best for your specific situation and goals.

Saving for other financial goals

Saving for non-retirement-related goals is the next priority. Here are some non-retirement goals to consider:

• Saving for a down payment

• Saving for a real estate investment like a vacation home

• Saving for your children’s future or college education

What to do with extra money regarding these goals depends on how far out the goal is. If you’re saving for something for 10 or 20 years, it might be worthwhile to invest the money in the stock market or mutual funds, but if you’re hoping to use it soon, think about keeping the funds liquid in a savings account or other bank account.

But again, before investing, be sure to ask a financial professional for guidance. 

Rewarding yourself

Taking care of yourself financially is essential, but so is enjoying your life along the way. If you have been making solid financial decisions, paying down debt and saving money when you can, rewarding yourself is an acceptable plan for what to do with extra money. 

This could be something as simple as a cappuccino on the way to work or as luxurious as a vacation.

Make a plan for your extra cash

There are endless options for what to do with the extra money, including building up your emergency fund, paying off debt or saving for retirement and other big goals. If you’ve already made strides in these areas, you may consider treating yourself.

Talking with a financial planner can help you determine which option is best for reaching your personal and financial goals.

If credit card debt is in the way of freeing up extra cash, check out Tally†, a powerful tool to help you pay off credit card debt. The Tally app combines all your credit cards into one monthly payment and offers a lower-interest line of credit so you can pay down your higher-interest credit card debts more efficiently.

†To get the benefits of a Tally line of credit, you must qualify for and accept a Tally line of credit. The APR (which is the same as your interest rate) will be between 7.90% and 29.99% per year and will be based on your credit history. The APR will vary with the market based on the Prime Rate. Annual fees range from $0 - $300.