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