Over the last several years, droves of consumers have been tightening their purse strings in an attempt to stretch their paychecks further each month as sticky inflation continues to drive up the cost of nearly everything.
Following months of soaring price increases due to surging inflation and two-decade high-interest rates, economic turbulence seems to have begun stabilizing more recently.
With prices falling, and the cost of some goods and services beginning to decrease, some consumers might find themselves having a bit of disposable income left at the end of their paycheck each month.
While in the past many would’ve used this cash to splurge on luxuries, some are now considering putting this money to use, either to pay off debt, clear their credit accounts, or make small contributions to their emergency funds.
Making the right choice might seem hard, however, we have seven tips on smart money moves you can make if you have a bit of extra cash left at the end of each month.
Seven smart money moves with your extra cash
As prices begin to stabilize, and individuals stock up their savings accounts for emergencies or prepare for a recession, it’s time to consider other smart money moves that can help you leverage your excess money more appropriately.
Invest in a brokerage account
Brokerage accounts have become widely popular in recent years as digital technology has helped to democratize financial services for larger portions of the general population.
Generally, a brokerage account is funded by excess savings or income that are available in your transactional bank account. There is no limit to the amount a person can contribute, and account holders can withdraw these funds at any given time, without enduring early withdrawal penalties.
The purpose of this account is to allow individuals to invest their cash in different financial vehicles, such as stocks, bonds, commodities, exchange-traded funds (ETFs), or mutual funds.
Some individuals have taken on the responsibility of managing their brokerage accounts themselves, however, this can come with increased risk exposure in the event of sudden market turmoil. There are brokerage accounts that can be managed by a professional broker, however, this would mean that you will need to pay a monthly or annual brokerage fee.
Brokerage accounts can be a simple, and tactile way to grow your financial portfolio. Keep in mind that these accounts are subject to capital gains taxes for any profits made on the sale of certain investments.
Open a Tax Free Savings Account
Another smart money move is to open a Tax Free Savings Account or TFSA. With this type of account, you can make monthly or annual contributions, which are then used to purchase or invest in products such as mutual funds, ETFs, bonds, or cash equivalents.
One of the most attractive selling points of a TFSA account is that any returns made on the account are considered to be tax-free. While this may seem like the key selling point, both annual and lifetime contribution limits can be somewhat restrictive.
For starters, the annual contribution limit for 2023 is $6,500. However, in case you have never opened a TFSA or made contributions to such an account before 2009, then the maximum amount you deposit is $88,000 this year.
Another important consideration is that any contribution limit made in one year will roll over to the following year. There may additionally be penalties, or fines attributed to an individual’s account if they breach the contribution limit, and there are several tax-related implications that can make TFSA withdrawals increasingly complex.
Nonetheless, it’s advised to discuss the possibility of a tax-free savings account with a professional, a broker, or even a financial advisor. Furthermore, even at the current annual contribution limit, the max a person can deposit in this account per month is $540.
Overall, a TFSA account is a smart and simple way in which you can grow your money, especially if you do not have the financial know-how or expertise to diversify your investment portfolio. What’s more, the monthly or annual contributions are small, which allows you to deposit what works for your budget.
Contribute to a high-yielding savings account
While you may already have a general savings account that allows you to access your excess cash whenever you may need it, consider opening a high-yield savings account that gives you a generous amount of interest on your monthly contributions.
Typically, high-yield savings accounts are straightforward to manage, and you may be eligible to open such an account with your existing bank or financial services provider.
You may also be eligible for a high-yield savings account with a neobank or fintech company. All you need to do is make sure that you meet the necessary criteria, and that you can make regular deposits into this account, without incurring additional fees or penalties.
A high-yield savings account can become your emergency fund, which allows you to tap into this cash whenever you might need it. Additionally, it can be used as a way to track your savings goals, whether it’s to pay off debt, build a heft emergency safety net, or even save up for a long-term goal.
Depending on your direct need, consider the different types of high-yield savings accounts that are currently available. Some accounts are provided with zero monthly fees or annual maintenance costs, this is an affordable way to grow your excess cash, but also keep it safe in case of a rainy day.
Think of your high-yield savings account as the go-to place for your excess money. Be diligent with the type of account you decide to open. Additionally, make sure that you diversify your extra money, you can place a bit of it in a high-yield savings account but also put some of it into the stock market, or use the rest to pay off other debts.
Start repaying high-interest debt
Aside from using your excess cash or income to build your savings or emergency fund, consider using this money to pay off high-interest debt.
Paying off high-interest debt might not be the first thing that comes to mind now that you have some extra cash on hand, however, the recent increase in interest rates might have increased the amount of debt that you’re currently carrying.
Early last year, the Federal Reserve initiated a monetary tightening policy in an attempt to cool rising inflation. This comes after the central bank originally dropped interest rates to near zero percent during the first few months of the pandemic.
Now however, through a series of interest rate hikes, the Federal Reserve has made the cost of borrowing more expensive, both for individuals and businesses.
As of July 2023, the Federal Reserve hiked its prime interest rate between 5.25% to 5.50%, the highest level in more than 20 years. That means the last time interest rates were this high was when George W. Bush was still president.
With interest rates being at an all-time high, and some experts predicting that the central bank will further increase interest rates one more time this year, one of the smartest things to do with extra cash, for now at least, is to start paying off high-interest debt as fast as possible.
While the high interest rate era may only be temporary, it could be another several months, or even a year before the interest rates start to cool again, and consumers start seeing a decrease in their debt.
Raise contributions to a 401(k), 403(b) or IRA
Another way to put your excess income to work is by raising the monthly or annual contributions you make to your 401(k), 403(b), or individual retirement account (IRA).
Some financial advisors suggest that you contribute between 10% and 15% of your pre-tax earnings each year to your retirement account. While this might be the ideal scenario, other contributions, whether this may be monthly or annually could further help boost your retirement accounts.
In the event that you have maxed out your contributions, you can either open an additional fund or a new investment account, which would help create more diversified income for your retirement years.
Many experts suggest that it’s best to max out your retirement contributions, and while it’s not always possible to fund these accounts using your savings, some suggest increasing the deductible on your paycheck each month. Additionally, you can make arrangements to match any employer contributions, and further increase these contributions as you slowly reach the age of retirement.
Start paying off student loans
The pandemic-era student loan freezes have come to an end. While thousands of other individuals may have had their student loans waived, under new student loan forgiveness programs, those that are not as lucky will need to start making a plan to pay off their student loan debt in the coming years.
Most up-to-date statistics indicate that on average, individuals have roughly $37,338 in federal student loan debt. For private students, this amount is even higher at $54,921 per borrower.
Some individuals spend nearly their entire professional career paying back student loans, and with interest rates now being off the charts, it’s advised that younger individuals, stepping into the workforce should use their excess income to pay off their student loans as quickly as possible.
Student loans incur interest over time, which only leaves a person with more to repay by the time you enter a career. Experts suggest that when a person is not fully yet in a financial position to repay student loans, they should make an effort to try and repay the interest, as this could leave them with a lower principal amount to cover.
For those that have the chance to come into a bit of extra cash, the best advice would be to consider any type of debt you may still have, starting with student loans. These can take years, even decades to repay, and it’s best to get this off your record as fast as possible, so that you can instead use your additional cash on more important things, such as saving for retirement or building an emergency fund.
Invest in non-retirement objectives
Another plan that you can make with your extra cash is to invest in things that are directly related to your retirement. This could for example be something such as opening a 529 savings plan. This is a tax-advantaged investment account, which allows you to grow any tax-deferred funds that can be used to pay for educational expenses such as going to college or attending grad school.
You can also open this account on behalf of someone else, such as a family member, or sibling, to start helping them save for a more important goal such as attending college after high school.
One other possibility could be to invest your extra cash in something important to you, such as a hobby, or learning new skills.
Oftentimes, many people will use their disposable income to invest in their futures. This could be to enroll in a class, or an online course that can help them build their career opportunities, give them the chance to learn new skills or improve on those they already have.
Perhaps you can use that money to fund your hobbies, which you can later then turn into a small side business. While the idea might not be to build an entrepreneurial empire, for now at least, it’s always good to invest in the things that you consider important and valuable.
Final thoughts
While there may be months where you will see you have more paycheck left than a month, other times the situation may be somewhat reversed. Regardless of which side you may end up on, having a bit of extra cash can go a very long way, especially if you’re looking to invest in your future and grow your money.
Using your excess cash, to invest in the things that you consider important, whether that be retirement, paying off student loans, or even learning new skills, there are several money moves you can make to help relieve you of financial stress but also help improve your financial well-being.
Keep track of your spending, and how you budget for necessary expenses. But more than this, make sure to keep track of where and how you put your excess money to use every month, whether it’s in a brokerage account, or even into a high-yield savings account. Make sure to get your money working, and look for opportunities that can benefit you in the long term.
