When money is tight, it can be hard to imagine that you will ever have “extra” cash. However, there may come a time when you have paid off all of your bills and you have money left over.
It’s a wonderful feeling to know that you have enough. But don’t let your additional income go to waste by not maximizing it. You may need to have suggestions for how best to utilize that money.
So, let’s look at some ideas for using leftover funds.
1. Use money leftover to save for emergencies
It is hardly surprising that having funds in the event of an emergency should always be a priority. And many people may have a substantial amount of money set aside for emergency situations.
If you want to save money with each paycheck, the first step is to check the status of your emergency savings fund.
Types of emergencies to plan for
Emergencies aren’t like surprise sales events. They can occur suddenly and require you to pay out-of-pocket expenses or have repairs completed. You could require a plumber if your hot water heater bursts on your floor.
An unexpected airplane ticket home to see family for a funeral, a surgery to save your beloved pet’s life, a new car after yours gets totaled in an accident. These are all potential emergencies to prepare for. You don’t know when disasters will happen, but you have to be able to expect that they will.
And of course, losing your job or having to take a leave of absence is a significant financial emergency that you must consider. That means you must maintain an emergency fund sufficient to live off until you can get back on your feet.
How much to have in an emergency fund
Your emergency fund may undergo various phases, so check with yours to see how you are doing. Refer to whether you have enough set aside for emergencies if you have extra money remaining after paying for your paycheck.
Financial planners advise having a starter emergency fund of $1,000. This amount isn’t sufficient to cover a very pricey emergency, but it’s something you can fall back on until your next paycheck.
If you have extra funds remaining after paying all of your bills, you should use your paycheck to create a rainy day reserve of at least $500 or $1,000.
Another suggestion for money leftover after expenses is to continue to bulk up your emergency fund. Once you have reached the milestone of $1,000 for minor, one-time emergencies, you should gradually increase your savings account to build a more substantial emergency fund.
Financial advisors frequently recommend an emergency fund that is three times to six months’ worth of expenses. The emergency fund is to be used to protect against severe financial hardship if you become unemployed or laid off from your job. This money is enough to cover the monthly necessities, such as rent/mortgage, food, and transportation costs.
It’s particularly important to save up in advance when an unexpected expense arises. You can’t always prevent such expenses, but you can choose to save up enough in advance for them. While you have leftover money from your paycheck, set aside this money for a rainy day.
Now is the time to save above what the six-month limit for emergencies is. Freelance workers who earn a variable income, such as you, may want to save as much as a year’s worth or possibly even 9 months of expenses.
You can also go with your gut on this one. If you have circumstances that make you feel worried about having a 6-month emergency supply, then set aside some of that leftover money each month until you have more money on hand.
Maybe you have a job that is very unique and will take some time to complete, or you might be both with and without steady work. An excess emergency fund might be helpful.
2. Use money leftover to pay off debt
Next, after you’ve established an excellent emergency fund, you must examine your debt situation.
One of the main benefits of leftover money is that you can use it to pay off debt. You can also save for the future while doing so.
Debt avalanche: pay high-interest debt first
When designing your repayment plan, there are various factors to consider. The most mathematically sound choice is to pay off minimum payments on all loans, then throw any remaining money at the loan with the highest rate of interest. That’s called the debt avalanche.
Factoring in your high-interest debts, particularly credit card debt, is a great way to allocate your cash. Canceling high-interest loans will give you more cash each month.
Debt snowball: pay off smallest debts first
When planning your finances, you should pay the minimum possible amount. However, if you have money left over from your income, you probably are already doing that. You can choose from two options: Debt avalanche or snowball.
Using the debt snowball method means that you focus on minimums and then knock out the smallest debt first. You ignore interest rates and just look at the dollar amount owed. If you have $500 in debt, $2,500 in debt, and $30,000 in debt, you would first pay $500 regardless of the interest rate.
Whatever method you choose, or if you prefer to create your own debt payoff plan, the key to eliminating debt is to use your remaining cash to pay down existing obligations. Again, use that leftover money to pay off debt!
3. Invest money leftover for retirement
Once you’ve confirmed that you can manage medical emergencies and your living expenses are taken care of (or you’re on your way), consider retirement. Don’t just spend everything you have on handbags or vacations. Think about your future self and plan ahead for her.
Retirement is not quite as far away as you might imagine! Starting early with your retirement savings is a good way to maximize your investments. Even if you work for yourself, you have retirement savings options.
Start a retirement account with left over money
The first step in retirement planning is to open a retirement account. If you’re new to financial planning, there’s no need to worry because it’s easy and straightforward. You can start a 401(k) or IRA to save for retirement, and if not, an IRA is an excellent choice.
my biggest regret from my first post-college job is that I did not open a retirement fund sooner. I spent about five years, during which my savings could have grown instead of sitting in an account. Don’t worry about it if you have leftover money.
Max out your 401(k)
Ideally, you should use your tax-advantaged retirement account to the fullest. If you’re currently contributing, try to increase your percentage of your income contributed.
The 401(k) maximum contribution is $22,500 in 2022, according to the IRS. So if you’re contributing less and you earn enough money at your work, increasing your contribution is an excellent idea.
Clearly, the more you contribute now will result in more money in the future. An additional option for your leftover money is a company 401(k) match, if possible.
Some companies match your contributions to your retirement account, giving free money in the process. If you’re not contributing a 3%, 4%, or other match, you’re leaving money on the table.
Open an IRA or Roth IRA
While the 401(k) is not open to most people, the IRA is a tax-advantaged retirement account for everyone. The IRA and Roth IRA give you a way to make a large purchase without putting you in a financial bind.
You can establish either a traditional or Roth individual retirement account (IRA), so you can deduct the contributions from your taxes. You may also elect to establish a Roth IRA, which can help you put aside funds and avoid paying taxes on the funds when you retire and withdraw them.
IRAs and Roth IRAs are beneficial alternatives to employer-sponsored plans, or they can be added to 401(k)s, 403(b)s, and 457(b)s. Each of these accounts provides individuals with various benefits as they age, making these plans an excellent tool for saving.
Begin investing in real estate
Now, not everyone gets excited about real estate as an investment, but it’s another avenue for retirement investing if you’ve received the proper funds for all your expenses and have depleted your other retirement savings plans. Real estate could be your next investment if you have remaining capital left over after your expenses and your other savings plans are exhausted.
Real estate investing allows you to diversify your portfolio, giving you a tangible asset that will increase in value over the years. By renting out a property you own, you can eventually generate passive income from it.
There are some passive income investments that do not offer as much upfront effort and money as more conventional investments (such as investing in REITs).
However, do your own research and consult with experts who have experience with this before buying property. You may have to forfeit money on a real estate purchase.
4. Use money leftover for your other financial goals
Having money left over after expenses means there are a lot of options, and one needs to find other significant financial goals.
Not all of these tips will apply to you, but consider them and others that you may come up with in the future. Some of your excess funds can be put towards achieving these goals.
Fund children’s college
Any parent knows that being responsible for your child’s school is a huge responsibility. And while we don’t know exactly what the future of education will look like, we can save a little something for our child’s school.
Custodial accounts and 529 programs are useful tools for parents to use to prepare for their children’s future. Consider your timeline (how long until your child goes to college) and how much you’d like to contribute. Some accounts are restricted exclusively to university-level courses, while others have a bit more leeway.
Pay off your house early with left over money
Are you interested in having your own home paid for? You can use leftover funds from your paycheck to defer home ownership. Many people enjoy having their own home, and the peace of mind it provides.
Homeowners frequently take out a loan to finance the purchase of a house, possibly for a term of 15 or 30 years. This is understandable because a home is one of the largest expenses a person might ever make.
Paying off your house may be an excellent idea if it doesn’t conflict with your other financial objectives. It may be a poor investment compared to the stock market, but it provides a decent return. It is certainly worth it for many people to own their own homes.
Launch your own business
One of the best ways to invest leftover money is to start your own business. Maybe you have a brilliant idea for a business.
However, unlike some less labor-intensive tasks, others require a large investment of money.
You can spend your leftover money for your new company. Use these funds to rent a workspace, buy equipment, or handle other new-business expenses as you take it off the ground.
Give generously
Helping others can bring you happiness and fulfillment.
When I first encountered the phrase “give generously,” I immediately thought of half a dozen charities, causes, or people I would like to support.
Travel more with money leftover
Maybe, like I do, travel is very high on your to-do list. If you have extra money left over, you would absolutely put every penny into your travel fund if you could. It’s a great idea to use some excess cash saved from those sales trips to save for that vacation you’ve wanted to go on.
Estimate how much your dream trip might cost. Then start saving $50 or $100 or more each month in a special travel account. The joy you feel as you plan your overseas medicine trip can be felt as you see the stockpiles of medications grow.
5. Put money leftover into having fun
Now, let’s talk about how we can use leftover funds to have fun. As long as you’re taking care of the key expenses and maintaining responsibility for yourself, then you have a source of enjoyment as well: your money.
Increase your fun money budget
Many people and partners budgeting with line items for “fun” plan ahead to use their last resort for anything they think is exciting. This could mean something that no one else in the family prioritizes, but they think it’s great, so it’s a great use of their money.
Budget some of your remaining funds for guilt-free fun is a great way to avoid burnout on financial matters. You’ll be able to relax more and enjoy life more if you don’t feel too restricted.
Explore new interests
Oftentimes, we focus so much on our job, our career, our child, our partner, and so on that we neglect to have interests of our own.
Would you like to go to an art show, go to a conference, or go on a family RV trip due to financial reasons? Now may be an excellent time to do some spending on those interests or pastimes.
Only you understand exactly what lights you up, but it is good to spend money on things that have real value to you.
Use left over money to splurge without guilt
Fun money should not cause guilt. Everyone needs a break from time to time. There also won’t be any need to list every purchase or expense you make.
There’s no need to spend 24 hours a day, but that’s what makes splurges so special. You don’t buy these things every day, so they make your day unique.
Think of any small or large splurges that would really make you feel like a million dollars. This could be a new nail polish or a weekend getaway with your friends. It is never wrong to be prepared for it and not feel guilty.
Put money leftover to good use and have fun too!
There are many ways to use any remaining budget you weren’t expecting. For example, you could first save for your emergency fund and debts, but don’t forget to place some fun in your budget as well.
