If you are a person who at the end of the month finds they have money leftover then you should consider yourself lucky! So many people live paycheque to paycheque (or even go into debt before receiving their paycheque). If you have leftover money at the end of the month, what should you do?
Well.. it really depends on your goals
Firstly, if you are finding that you don’t have any money at the end of the month then starting with creating a budget is the most important thing. Thankfully, technology has made this so much easier and there are some awesome apps to help you stay on track and automate this. My favourite is Monzo (available in the UK) but outside of the UK Revolut is probably the next best thing.
But if you’ve come this far I’m going to assume you already have a budget sorted out right? So let’s see what we should do with our leftover money at the end of the month.
Pay down high interest debts
If you have a credit card or loan balance, I would strongly consider paying this down first. If you have credit card debt this should be your first port of call as interest rates can be up to 35% annually and any gains or value you might get from using this money to invest will be negated by such a high interest rate.
If you have multiple cards, a good tip is to pay down the smallest card first because then you will start to see progress quicker and this can help you gain momentum. However as a rule of thumb, always pay down the debt that has the highest interest rate first.
Once this has been paid down, consider if you have any other debts with interest repayments to cover, such as student loans, car loans or a mortgage. In a similar light to the above, always prioritise higher interest debt and try pay off debt for the things that are not income producing assets.
So if you had a car loan, student loan and mortgage I would prioritise the car loan because it probably has the highest interest rate. A car loan is also is for a liability instead of an asset as a car will lose value over time, whereas a loan for a house can be a good type of debt because a house can go up in value and also pay you an income.
Build an Emergency Fund
Once you have paid down debts that have high interest rates or debts for liabilities, it’s time to build up an emergency fund. I am so thankful I took my own advice with this one because when lockdown 1.0 started in the UK I lost my job and I had to live off savings for almost 9 months! Lucky for me I got back onto my feet financially but without this I would have had a lot more stress in my life
If you have leftover money you should aim to build up at least 3 months of expenses but ideally 6 months. Trust me, future you will thank you for this.
Define your long term and short term goals
So once you have the emergency fund sorted, its time to think about what you would like to use your money for in the future. For example if you are saving for a house deposit you might want to consider leaving your money in cash or in low risk investments like bonds or a savings account because the stock market can be volatile and if you need the money on a certain date, you might find yourself in a position with less money than you started.
Generally speaking, if you are investing for 5 years or more then shares can be a good choice because you should be able to ride out any volatility. And because shares generally go up more than they go down (the S&P500 has returned around 10% annually over the past 100 years) you are likely to make some money.
By first understanding what you need the money for you can then define the how. When it comes to money and investing most people just focus on making a return on their investment, without considering when they need the money. Which brings me onto an important point.
Understand your risk tolerance
Ask yourself the question, will I be ok to see my investments go down in the short term to try get a bigger gain or would I sleep better at night knowing my money is safe. This is a super important question you need to have an answer to before you decide where to put your leftover money. If this is the case you should think about what investments are the right thing for you.
Contribute to Pension/ Retirement Fund
If you are not really sure about risk or if you don’t need the money, it’s a great idea to maximise your pension or retirement fund. In the UK you if you are a basic rate tax payer you will get an instant 20% return on your money and 40% gain if you are a higher rate tax payer which is really quite hard to beat!
Remember, by having leftover money at the end of the month you are already ahead of so many people! Don’t be afraid to enjoy your money as well but having a clear goal in mind and thinking about how money can work for you means that you will thank yourself in later years.
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