April is Financial Literacy Month! Financial literacy is defined as the understanding of financial topics related to managing personal finance, money, and investing. Amy Berry, Associate Director of Retirement Benefits & Pension Plans for MUS, is our guest writer today, and shares the following article to help improve financial literacy when faced with the fortunate situation of having a little extra cash on hand.

Got some Extra Cash?

Occasionally we may find ourselves with a little extra cash in our bank accounts.  Maybe you just paid off a credit card or your car payment?  Or you have a side hustle?  Maybe you get a raise?  Or your kiddo starts school and you no longer have that daunting childcare bill?  There are a lot of life events that allow you to give yourself a “raise,” but finding a way to make that raise work harder for you in the long term can be a little more challenging. Instant gratification can be tempting, and sometimes we find we’re just replacing one bill with another. So when you find yourself with a bit more income, here are a few things to consider:

1.     Wait a Few Weeks

Make sure you know what portion is going to you before you make any big decisions.  Depending on where your new-found income is coming from, your taxes and withholdings may change.  Don’t be caught off guard by allocating your new money before understanding your current obligations. 

2.     Reassess your Budget

Before allocating money to budget categories, this is a good time to assess your budget and see if there are ways to save more.  Once your budget is in place, then think about where your “raise” is going to do the most good.  Consider starting an emergency fund (3—6 months’ worth of expenses), paying off debts, or increasing contributions to your retirement plan.

3.     Avoid Lifestyle Creep

Lifestyle creep erodes building wealth.  With an increase to your pocketbook comes the temptation to immediately increase your standard of living, but first carefully consider: “Is this new expense really necessary?”  If not, then resist the urge to spend your money now and save it to grow its value and provide financial resources for your future.  The key to savings and retirement readiness is continuing to live below your means; i.e. pay yourself and your future first.

4.     Attack your Debt

Getting a “raise” is a good time to accelerate your efforts to reduce debt.  Consider increasing your monthly payment to pay your balance off quicker and avoid increased debt due to interest.  Attacking your high interest debt is the easiest way to begin building positive net worth. 

5.     Build your Emergency Fund

Everyone needs an emergency fund.  Life is full of unexpected events so be prepared to deal with the loss of a job, a medical emergency, or a car repair by saving 3—6 months’ worth of expenses.  Once you have a little more income, use either split direct deposit (if you employer offers it) to fund different accounts or set an automatic transfer from your checking to your savings until you reach your goal.  Automation is your friend when saving!

6.     Reexamine your Retirement

Once your daily expenses have been addressed, it’s time to examine your retirement plan.  Consider that you have been living on your pre-raise salary and your “raise” could go to helping you be retirement ready.  Increased contributions to your retirement plan mean more retirement income in your portfolio.   Consider the options available to you through your employer or a personal IRA.

7. Reward Yourself

Celebrate or allow yourself to scratch that “I’ve got money to spend” itch by rewarding yourself with a one-time purchase.  Buy tickets to a concert or sporting event, new clothing, or meal out.  A one-time purchase allows for a reward without increasing your future expenses.

Remember, one of the best things you can do is pay yourself first:  before you pay your bills, your groceries, pay other expenses, set aside a portion of your income to save.  The first bill every month should be to pay yourself and your future self.  Prioritizing your savings helps you to develop the mindset that you and your future are important and develops good financial habits.  The most important step is to just start.  Starting small is a good start.  Continue to increase over time.  And just like a diet, if you have a set-back forgive yourself, move on, and start again to create your best financial future.

Developed from Money Crashers, Business Insider, Discover, Personal Finance for Beginners, and Get Rich Slowly.

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