Making money in your career is half the battle, but what you do with that extra income can make the biggest difference…
…in helping you retire early, buy your dream house, or reach other big goals.
And if you’ve got free money sitting around in savings accounts and checking accounts, you can put that money to work to reach your goals faster, too!
But putting your cash in the wrong places can hold you back, force you into a late retirement, and keep you from reaching your financial goals.
So here’s what we’ll look at in this article:
Let’s get started…
First, if you have high-interest debt like credit card debt, it’s usually a good idea to pay off that debt as quickly as possible.
Credit card debt often comes with a high interest rate (17-20% or higher), so you could free up a lot of extra cash by just paying down this debt and not having to pay interest in future months.
Picture your savings as water in a bucket that you’re trying to grow each month.
And those monthly interest payments are a hole at the bottom of the bucket. Every month that you carry high-interest credit card debt, water is dripping out! If you plug that hole, you get to keep all of your water.
So that’s why I recommend paying off all high-interest debt as one of the first steps when you have enough income or extra cash to do so!
After you’ve paid down credit card debt, look at other debt such as car payments.
Now that we’ve plugged the biggest “leak” in your finances, let’s look at some more ways to put your money to work for you so you can earn more from your cash.
One of the best ways to increase your income and future earnings is to invest your spare cash/income back into yourself!
If you can build new skills via books, online courses, coaching, etc., you could earn thousands of dollars extra each year.
I’ve learned skills from a $10 book that have made me tens of thousands of dollars or more (the topics I read about were digital marketing, copywriting, and other related areas).
Other tiny investments, like a $100 online course, have also paid huge dividends in my life and career. Those are the single best investments I’ve made as I’ve grown this website and blog, which is my full-time business!
So while traditional investments, like a 401k, should be a part of your strategy, and we’ll cover them soon, don’t neglect to put your pay and income back into yourself, too! Because if you’re like most people, your knowledge and skills are what earn you the most money right now.
This idea is especially powerful if you have a relatively small amount of money to invest.
For example, if you’re wondering what to do with an extra $1,000 or $500 a month, or just a single amount of $1,000 in the bank, investing in yourself is one of the best things to do with your money… and one of the most effective ways to see a return on that investment.
The stock market is one of the best places to put your spare cash each month if you’re patient and willing to leave it for a period of multiple years.
Since its inception in 1926, the S&P 500 index has averaged a return of approximately 9% per year when you include dividends and adjust for inflation. That’s quite good! In fact, a 7% return per year would double your money in 10.2 years!
However, where most people go wrong is trying to time the market, beat the market, or second-guess their plan after they’ve entered a position.
The average investor will do best to simply “set it and forget it.” Put the money into a 401k or brokerage account, make wise investments, and then leave it for years or even decades while checking every three to six months (not every day!)
The stock market is a great place to put extra money for a few years or build retirement savings, but many investors are their own worst enemy here, so make sure to keep your emotions in check, and only invest an amount that you’re willing to see fluctuate up and down!
Although the stock market averages a positive return over time, that doesn’t mean you won’t have down years, because you will.
While no bank account is offering particularly high interest rates in the US right now, some are certainly better than others.
And one of the best things to do with some of your extra money is to earn interest in an FDIC-insured (Federal Deposit Insurance Corporation) bank account. There’s no risk to you, and that little bit of extra interest can help cover living expenses or compound your savings over time.
Look into certificates of deposit (CDs) with your bank, too. With a CD, you promise the bank that you’ll allow them to use your money for a specified time period, and in return, they pay you more interest. This is a great way to make some extra money if you’re sure you won’t need the cash for six months, 12 months, or longer.
If you already have some savings but are unsure what to do with your money in a savings account, then a CD is one of the fastest and easiest options to consider, and certainly one of the safest.
However, if you want an average return that’s higher than the typical CD interest rate, consider investing in the stock market (mentioned earlier).
As a general rule of thumb, you should aim to have at least six months of living expenses in a bank account in case you lose your job or need to take time off from work.
So as you make more money, put some of that extra cash in a dedicated “emergency fund” account that you don’t touch!
Once you’ve got six or twelve months of expenses covered, you can stop contributing. So you don’t need to put too much money over time. However, it’s a good way to make yourself more financially secure, and this type of fund is a good place to put a little extra money to start!
If you have a lot of money and don’t know what to do with it, or you have a relatively high income, you can consider buying a home to eliminate your rent payment. Sure, you’ll still have a mortgage payment, but you’ll be building equity (ownership) in the property!
Now, renting vs. owning is a complex debate and it isn’t as simple as some people make it out to be (you’ve surely heard someone say, “renting is throwing money away,” which is NOT always true).
However, as a general rule of thumb, if you’re going to be living in the same place for five or more years, it’s often better to buy a home. If you’re going to stay for 10+ years, it becomes a no-brainer in my opinion.
This doesn’t mean you can’t sell a home and profit in less time, but it becomes more difficult. Plus, when you sell a home with a real estate broker/agent, you pay a commission which can often total 5%.
One more option if you have a lot of money and are unsure what you should do with it: Consider investing in rental properties.
Along with owning your own home, you can buy other properties to fix up and then rent out, earning a recurring income each month and putting your spare cash to work for you! The income from rental properties can even surpass your work income over the long haul, as you buy more properties and gain more tenants paying you rent.
So while it’s not easy or instant to start, investing in real estate to build rental income is one of the best things you can do with a large amount of spare money in the long-term. This can even lead to early retirement.
Next, you can use a portion of your extra money to start a business or side hustle.
Some businesses, such as freelance consulting, cost very little to start.
A product-based business (for example, if you wanted to sell homemade cupcakes) takes a bit more money to begin, but is still doable, and can often scale to a higher level of income in the long run!
So if there’s a business you’ve been thinking of trying, it’s definitely a worthy place to put a bit of your extra money. If it works out, it can end up being the best investment you’ve ever made.
(That’s my case with this website! I spent less than $150 to start back in 2012, for web hosting and a domain name, and it’s now replaced my full-time job income.)
If you want some business and side hustle ideas to get you started, go here.
If you don’t want to start your own business, you can still look for opportunities to invest in the businesses of other people. I’m not talking about the stock market here; I’m talking about small, private businesses that need an inflow of cash.
You may have friends or colleagues who are starting businesses and could use extra financial support in exchange for a piece of the business. Or, you could go to local entrepreneurship meetups and events to expand your network and find opportunities.
Investing in small businesses is somewhat risky (by risky, I mean there’s a big variance in returns and lots of uncertainty), but it’s one of the best ways to make money if you spread your investments around.
However, in my opinion, this is a better option after you’ve run a business of your own (or at least worked as a freelancer). That way, you’ll have some experience and the ability to evaluate whether you’re making a good investment with your cash!
Yet it’s also possible to study and learn this on your own, or you may come from a business background and have experience through your day-job that allows you to evaluate small businesses and decide which are worthy of making a cash investment.
You’re going to be spending some portion of your extra money… on groceries, utilities, etc. So why not make money while you spend? This is what credit card rewards allow you to do.
This isn’t going to get you an early retirement or make you a millionaire, but it’s a fast, easy step that costs nothing and can help fund other projects or help you cover some basic monthly expenses.
There are many no-fee and low-fee credit cards that give you rewards, from extra cashback, to travel points, on the money that you’d be spending anyway.
Just pay your credit card bill at the end of each month so that you never carry a balance and pay interest!
I’ve done this with credit cards for years. I put all of my expenses on a credit card, and I always pay it off, racking up extra cash and rewards for free.
However, you should never use a credit card to purchase items that you can’t afford or wouldn’t buy otherwise.
Now that you know what to do with spare money and income, let’s look at what not to do with that extra money in the bank or extra income from work.
One big mistake is making long-term investments but then expecting everything to happen extremely fast. I’ve seen people invest in a value stock with the plan to hold it for years, and then panic when it drops in the first week.
Sometimes, they even panic and sell. If you bought something to hold for years, you shouldn’t even be looking each week.
Some of the biggest mistakes I see are mental, like the example above. Don’t expect everything to be fast and instant, and think about your time horizon when entering an investment, so that you don’t panic in the first week.
Another common mistake is to buy depreciating assets. The most obvious example is new cars. As soon as you drive a new car off the lot, it loses a significant portion of its value!
It’s much better to put your extra income to work for you via appreciating assets… which are assets that go up in value. In general, almost all cars go down in value, and rather quickly. So buy a good, reliable car but don’t worry about impressing everyone with a luxury brand.
Trying to look rich is a great way to stop yourself from becoming rich, and buying/leasing cars is the most common way that people fall into this trap and end up taking longer to build real wealth and financial independence.
As a final note here, buying a used car that’s just a few years old and still under warranty is a great way to take advantage and benefit from this concept! A car loses a sizeable portion of its value (and therefore cost) in the first few years. So if you can find a car with a 10-year warranty that’s just a few years old, it can make a great used purchase.
I mentioned this on the list above, but can’t emphasize this enough: For most people, your own skills and ability to get paid by an employer will be the biggest money-maker in your life.
Don’t neglect this as you look toward other investment opportunities like stocks, CDs, high-interest savings accounts, etc.
Sure, some people will make more money through the stock market or their 401k over the course of their lifetime, and you can certainly get to the point where you’re earning more from real estate or a business, too.
But for the majority of people, especially those in their 20’s and 30’s, your own skill set is your biggest asset and biggest money-maker.
You should put a portion of your extra income or saved money toward your education… via online courses, books, etc. I’m a big believer that your education isn’t done when you finish school, and that mindset is what helped me grow a successful business and reach my own financial goals (zero debt, financial independence, no job/boss, etc.)
So as you spend and invest your extra money, just remember to keep cultivating the things that earned you this money in the first place… your skills, knowledge, and experience!
Because the more money you make in your career, the more additional income and cash you’ll have to invest with. This will make everything else on the list above happen faster… from building an impressive stock portfolio to growing a real estate empire.
We’ve looked at a lot of ideas above for what to do with money sitting in a bank account or with extra income as you get paid.
Now that you’ve read the 10 ideas above for what to do with saved money and extra income, it’s time to work out a plan that suits you.
Consider your total amount of savings and income, your risk tolerance, and how quickly you’re looking for a return on your investment.
Then, decide what makes the most sense given your goals.
And if one of these ideas for what to do with spare money is out of reach right now (for example, if you can’t afford the down payment on a house), you can still get there over time! Set a multi-year goal and start working toward it.
You can also divide your extra income into multiple accounts and investments each time you get paid, so you don’t need to choose just one option above.
For example, you could decide to create an emergency fund, and then begin saving for a house as soon as that’s done while putting your extra cash into a CD in the meantime.
The bottom line is this: There are a lot of ways you could invest your extra money and earn more with your existing cash, and the best strategy will be different for everyone. Start with the ideas above, consider your personal goals and situation, and create the plan that’s best for you.
Biron Clark is a former executive recruiter who has worked individually with hundreds of job seekers, reviewed thousands of resumes and LinkedIn profiles, and recruited for top venture-backed startups and Fortune 500 companies. He has been advising job seekers since 2012 to think differently in their job search and land high-paying, competitive positions.
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