Tax Refund, Bonus or big commission?
When you get some extra money it can be really exciting.
What do I want to do with this?
Go somewhere for a weekend?
Go on a shopping spree?
One thing is certain. If you don't make a plan, it will be gone within a month of it's arrival.
So let's ask the adult question....... What would be the responsible thing to do with the money? You can come up with any number of really fun and potentially frivolous uses for it – but what will take you closer to financial independence?
Here are some suggestions in a rough order of priority. Go down the list; if the first suggestion does not apply to you, then go to the next.
1) Short Term Emergency Fund: If you don't have at least $1,000 in savings – then this is your first priority. It is almost impossible to reach your financial goals if you don't have a little on hand to repair a flat tire or deal with any other minor disaster.
2) Pay down existing debt: Debt is like an anchor – making it very hard to move quickly toward your new home, retirement or other major goal. Getting out of debt and staying out of debt is the most important step in meeting your goals. Which debt should I pay? Here is a priority order for paying off those debts:
(a) Back Taxes: Getting the IRS their money so they will leave you alone should be high on the list.
(b) Current Taxes: Technically this item is debt avoidance. If you often owe taxes when you file and you don't already have the money set aside – this might be a great time to take care of that. Most have their property taxes included in their mortgage, but if you don't – putting this year's property tax aside is a good idea.
(c) Consumer debt: Car loans, credit cards and even medical debts should be paid off using the debt snowball. Choose your smallest balance loan and pay any extra toward it. If that loan gets paid you will then have it's monthly payment to put toward other debts in future months.
(d) Student Loans: Especially since most are currently deferred, these are on the end of the list.
3) Long Term Emergency Fund: If you don't have any debts other than the house – you should have 3-6 months of Emergency Fund put away just in case of an interruption to your income, illness or other more significant financial issue.
4) Save for a major purchase: If you are going to need a car or other major purchase in the near future – put your money aside now so you won't have to borrow later.
5) Retirement: If you aren't already putting away 15% of your income toward retirement, your extra money can help close that gap.
If you made it through all five options above without finding one that applies to you, Congratulations! You are already on the path to financial independence. You can give the money to your favorite charity or go do something fun with it.