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After your monthly expenses are covered, you might be fortunate enough to still have money on hand. With extra cash, what’s the smartest option: paying off debts, saving it, or investing it?
The answer is dependent on your financial situation: your debts, your goals and how you work with money.
Clearing credit cards and other loans should usually be a first priority. Credit cards and loans cost you interest every month - money that could be used to build your savings or investments.
The more debt you carry from month to month, the more you pay in interest fees - which pile up fast, always compounding, growing your burden more and more over time.
Carrying debt can limit your flexibility too. With too much, your credit score can take a hit, limiting your access to other loans and financing, narrowing your options for buying a car or getting a mortgage.
If you have extra cash every month, or if you only have it once in a while, consider paying off debts and credit cards gradually or in lump sum payments.
Bright can help, finding the smartest, fastest way to pay off debts, based on what you can afford and adapting as your income or spending habits change. Bright can even help you save at the same time, making payments and moving funds to a Bright Savings Account automatically.
Your saving strategy should start with an emergency fund with 3 to 6 months of your regular expenses. It’s like a personal safety net, so you don’t have to dip into other funds if you lose your job or face a major unexpected expense.
Most savings accounts pay interest every month, so your money grows while it’s set aside. Most savings accounts also don’t charge for withdrawals, so your money is always accessible too.
After filling your emergency fund, try saving for specific goals, like setting up a vacation fund or a fund for a new car. A goal can keep you committed, with extra motivation to add to your savings regularly.
With extra cash, you can divide it between your goals, or use a lump sum to jump ahead on something special.
The most important thing about saving is to do it regularly, regardless of extra cash. Make saving one of your regular expenses, so it’s part of your monthly budget. The more regularly you save, even in small amounts, the sooner your money starts earning you interest.
Bright can help you save more. With your personalized Bright Plan, we’ll move funds from your checking account to your Bright Savings Account when it makes the most sense for you - automatically. Bright learns about your income and spending habits, and adds to your savings throughout every month, so you’re always building your savings and earning more interest.
Investing is essential for reaching long-term financial goals. It’s how your money works the hardest, and in best case scenarios, earns more than a traditional savings account.
The best time to start investing is when you have 4 to 6 months of your regular expenses already accumulated in savings accounts. In conventional savings accounts, you can usually access funds quickly and without fees or charges.
Investments are intended to earn more interest than typical savings accounts. But in exchange for better earnings, investments also require risking your money.
Consider the difference: most checking and savings accounts are FDIC-insured to $250,000, but most investments are not insured. That means there is no guarantee the money you invest will be returned to you. But in exchange for that risk, investments typically earn more and grow faster than insured checking and savings accounts.
Investments are commonly used in long-term planning, because their value and earnings can fluctuate in the short- and medium-term. That’s why investments are often used in retirement planning. With many years to weather up and down growth, over the long-term retirement investments often earn more. Your earnings will also compound, adding to your investment and the interest you earn on it.
Some kinds of investments also offer tax breaks. In traditional retirement investments, like a 401(k), you usually don’t pay taxes on the money you invest, which can lower your tax bill now. Instead, you’ll be taxed when you retire, when your income is likely to lower and you’ll pay a lower rate.
With extra cash, once your debts are cleared and your savings are healthy, investing can help keep you moving toward more long-term goals.
A personalized Bright Plan is a good place to turn with extra cash on hand.
When you add it to your checking, Bright will automatically recognize it and allocate it to your card debts or your savings. Or transfer it yourself to your Bright Savings account!