In a recent article, we described how to create and stick to a simple household budget. The process consists of determining how much income you have each month, what your monthly essential and non-essential expenses are, and then subtracting your expenses from your income.
When you do, you will end up with either a positive or a negative number. Here, we are going to describe what you can possibly do with your excess monthly income if you are one of the more fortunate people in this scenario. There are four main options:
- Save it. Many personal finance experts suggest that individuals accumulate between three and six months’ worth of living expenses in a “rainy day” savings account that they can easily tap into in the event of a financial emergency, like a major home or car repair or a job loss. This may be a smart first priority for allocating any excess monthly income that you have. Once you have accumulated a comfortable amount of emergency savings, you can start another savings account with money earmarked for other purposes, like a vacation or new car fund, for example.
- Pay down debt. If you have accumulated debt, whether via credit cards, student loans or any other kind of debt, using excess monthly income to start paying this off can be a very wise financial move. In fact, being debt-free is one of the smartest financial goals you can set for yourself and your family.
- Invest it. Investing and saving money are two different things: Money allocated to savings is deposited into low- or no-risk vehicles like bank and money market accounts, while money allocated to investing is used to purchase various types of securities (like stocks) or fixed-income instruments (like bonds). For many people, opening a retirement account, like an IRA or 401(k), is a good starting place for investing. Doing so can help ensure your future financial security while also providing significant tax advantages.
- Spend it. Of course, you can spend this excess monthly income on extras beyond your essential and non-essential expenses if you like. In fact, if you have built up an adequate emergency savings account, contributed to your retirement plan and paid down your debt, it is OK to go ahead and use some of your excess monthly income to splurge a little. Go on a new clothes-shopping spree, buy that new big-screen TV that you’ve been eyeing or enjoy a long weekend getaway to your favorite cabin retreat in the mountains. You’ve earned it.
Meanwhile, if you have not yet taken the time to create a basic household budget, make a commitment to taking this first step toward building financial discipline today. Doing so will help lay a solid financial foundation that will serve you well for the rest of your life.
Previous article: How to Create a Budget and How to Stick to It.