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Experts believe that when you come into extra money, it is important to consider both paying something towards debts and setting aside a little for the future. However, how a consumer chooses to use an unexpected windfall may well depend on their individual circumstances.
Former financial adviser Bill Christie says, "Getting rid of that debt should be everyone's first goal. But, one should always stick a little aside, both for savings as well as for a rainy day." While this seems like a sensible option, what if there are other circumstances to consider.
Perhaps you are unemployed and are struggling with large amounts of debt, surely then paying it all towards debts is the bet option? Likewise you may be employed, but have your eye on something special, is it better to go ahead and splurge? The following suggestions can help whatever your situation.
Taking Care Of Debts
The first consideration that anyone should have when they have some extra cash is their debts. Consumers who only have a small amount of debt should pay it off if they have some extra money to do so. This will mean that you are debt free and have a fresh start allowing you to adjust your financial habits and avoid getting into debt in future.
If the debts are much higher, then paying a large chunk towards them can help keep you ahead of payments, but keep some money back to put into your savings rather than paying it all towards the debt. While this may not make much sense, when you consider that due to the current state of the economy, you are in a situation where you cannot always guarantee where your next paycheck or financial windfall is coming from. So it make sense to try to get ahead on your debts, but to save something for the future.
The 10 Percent Method
One useful option for consumers who currently have their debts under control is the 10 percent method. The idea behind it is to create a savings account and place 10 percent of every check, bonus or other money you receive into the account. Financial experts suggest that most people should have five separate accounts:
- A rainy day fund – containing money for fun
- An emergency fund – containing money set aside for unexpected bills or emergencies
- A bill fund – which has the money needed for monthly expenses
- A retirement fund
- An investment fund
The ten percent should be placed in the rainy day account. However, not everyone can realistically have all those different accounts. But, so long as expenses money is kept separate from spending money and there is at least one separate savings account, the ten percent method can still be put into practice fairly effectively.
Create An Emergency Fund
Creating a small emergency fund where you can save a little each month which can be used for unexpected bills or emergency expenses can provide a much needed financial cushion in times of trouble. The majority of banks offer interest bearing savings accounts where consumers can save money. The important thing is to ensure that the account is not linked to a debit card, otherwise you might be tempted to use the money before your really need it.
Making Investments In The Future
It is also a good idea to make investments for the future. One way of doing this is to start up a non-registered mutual fund. These types of account are very worthwhile and can be started with as little as $25.
If a consumer invests the same amount every month it will soon mount up. Extra funds can also be added if you find yourself with some extra money as well. Similarly, if you are a little short some months you can contribute a little bit less. These accounts offer a much higher rate of interest than regular bank accounts. In addition, because they are not registered, you can withdraw the money whenever you need to without incurring fees.
Alternatively, you may want to look at investing in a short term GIC. These accounts are ideal with consumers who do not have high debts. The longer the money stays in the account, the higher the interest. This option is best if you do not need immediate access to the cash as it can only be withdrawn at the end of the agreed term.
In closing, when you come into some extra cash, it is better to cover both your debts and your savings in order to keep you in the black. While everyone has a different situation, everyone can benefit from a little money saved for a rainy day and reducing your debts is always a good option.