7 Ways to Invest Some Extra Cash

7 Ways to Invest Some Extra Cash

Last month I received a small bonus from work and after the initial excitement of having some extra money as well as the appreciation and recognition for a job well done, I needed to decide what to do with it, as I didn’t want to blow everything in one go.

How could I make the most of it and allocate it in the best way possible to get bigger long-term results from it? Should I save it, use it to pay off debt, invest it or invest it in myself or my company to generate more income with it?

Here I’ve put together some key points that I hope will be of use to you for when you too find yourself with a little bit of extra money – maybe due to a (small) pay rise, a present or just because you’ve perfected your budgeting skills.

Here are some of the advantages and disadvantages of what you can do with some little extra cash:

Build an emergency fund

What: Save together $1,000 (or the equivalent in your country).

Pros: An emergency fund will allow you to pay for unexpected events without having to go into debt or eating into your savings. I also recommend to build a 6 months living fund with time to cover your expenses for up to 6 months if you find yourself without a job for a prolonged period of time.

Cons: Don’t put more than needed in this savings account, as it will likely not be making you any money due to low interest rates, so once you’ve hit your target amount, put any extra money elsewhere.

Pay off debt

What: Make an extra payment towards your debt, such as a credit card, mortgage or student loan, especially if you have any debts with an annual interest rate over 5%.

Pros: By reducing your outstanding principal, your interest charges go down and so will the long-term effects of compounding interest. The long-term goals of becoming debt-free also means more independence and peace of mind.

Cons: Paying off debt reduces your expenses in the long run, it doesn’t create more money. If you only have outstanding debts with a fairly low interest rate (4% or less), you might get a higher return-on-investment in other ways, such as investing it or generating another income stream with it.

Save

Save money

What: Put the money in a savings account to generate interest.

Pros: It gets you a little closer to your savings goals and it will make you some extra money over time due to interest and most importantly: compounding interest.

Cons: Interest rates are extremely low at the moment and below most inflation rates which means that not only will that money sit idly without making you much money, with time it will also lose value.

Contribute to you pension

What: Make an extra contribution to your private or workplace pension plan.

Pros: By adding more to your pension you’ll not only increase your pension fund, it also allows for it to grow even faster due to increases in returns and its compounding effects.

Cons: Any money invested in your pension plan will not be available until your retirement, you essentially lose access to that money for a long time (or you might be able to take it out before but will need to pay hefty fees.)

Invest in a brokerage account

Invest in the stock marketWhat: Invest the money in your own private investment account to generate interest and dividends.

Pros: Increase your investment funds, as well as the amount of dividends and interest generated to compound without losing access to this money.

Cons: You likely won’t benefit from the same tax advantages that pension funds give and you have to manage your own investments.

Invest in yourself

What: Invest in your individual capital by spending the money on a course, attending a conference or buying books to gain new knowledge or develop your skills.

Pros: Can be tailored to your needs and interest, and can have a long-term effect on your employability, professional development and / or earnings.

Cons: This strategy can be time consuming and prove difficult to see direct financial effect.

Invest in another income stream

Generate another income streamWhat: Set up a company, write a book, buy a property-to-let or find a different way to create another income stream with time.

Pros: Can provide you with a reliable, steady stream of income on the side.

Cons: Can be expensive, hard work, uncertain and unsuccessful.

Which of the above options you ultimately choose depends on your current circumstances: your dreams, plans, job, how much money you have to spend, the risks you want to take, how much time you can and are willing to invest, your family situation and many more. I hope however that the above helps in giving you a better idea of the various options to help you make a decision!

In addition to using your money wisely, if you feel you want to also enjoy a little bit of that extra money now and not just invest it in your future, consider sticking to the 50% rule: invest 50% and keep the rest to spend freely on whatever you want now. Or adapt this to whatever % you want: invest 70% and keep 30%, invest 20% and keep 80%..Whatever you feel happy with!

Day 23 / 31 Should you Invest?

Day 23: Should you Invest?
Day 23: Should you Invest?
Day 23: Should you Invest?

Now that we have covered the basics of investing and the stock market, you might still be wondering whether investing is the right move for you. This challenge starts with looking at reasons to invest, followed by some reasons to hold off investing, after which you should be able to make a more informed decision.

Why should you invest?

Let’s start with some of the main reasons that makes investing worthwhile to many.

  • Investing is an alternative to saving: by setting money aside people hope to grow it and with time build up a nice small capital. 
  • Over long periods of time, the stock market generally goes up. Even if there is the occasional crash when stock prices go down, if you have the time and the patience to sit it out and wait, the market will recover again.
  • On average the markets go up by somewhere between 7-10% yearly. That is more than most yearly inflation rates;
  • The market average is also normally higher than interest rates offered on saving accounts;
  • Another fun advantage of investing: many people like to track their shares and see how they are doing with their investments.

Continue reading “Day 23 / 31 Should you Invest?”

Day 9 / 31 Start paying off your debts

Day 9: Start paying off your Debts
Day 9: Start paying off your Debts
Day 9: Start paying off your Debts

Today’s challenge is to put in a plan of action to start paying off your debts. Now that you have seen how much a debt costs you and how much extra you are paying in interest in yesterday’s challenge, this is probably the best moment to kick those wretched loans to the curb as soon as possible.

Once you start paying of your debts you are beginning to regain control over your financial life, little by little lifting the strain of monthly payments and the psychological burden of being indebted to somebody else. Continue reading “Day 9 / 31 Start paying off your debts”

Day 8 / 31 Learn about Compound Interest

Day 8: Learn about Compound Interest
Day 8: Learn about Compound Interest
Day 8: Learn about Compound Interest

The thing with compound interest is simple: it can either make or break your financial future. That might sound like an exaggeration but it really is that powerful. Today’s challenge is to learn (or refresh your knowledge) about compound interest and see where you have compounding interest affecting your finances positively or negatively.

Compound interest is nothing more than interest over interest over interest. When this happens over any savings or investments you have, this is generally a good thing as it means your capital is growing more each year. Instead of receiving interest over your original amount, you also get interest over any interest you have generated in past years. In this way if you have an investment account with an 8% annual return and an initial starting amount of $10,000 that amount will be worth $46,000 after 20 years. Continue reading “Day 8 / 31 Learn about Compound Interest”

Day 2 / 31 – Calculate your Net Worth

Day 2: Calculate your Net Worth
Day 2 of the 31 Day Challenge to Financial Excellence
Day 2: Calculate your Net Worth

Hello again and great to have you back for the second day of the 31 Days Challenge to Financial Excellence! Today we are going to calculate our net worth to see how healthy (or unhealthy) our current financial situation is.

Your net worth is a sum of all your possessions (also called assets) minus the total of all your debts. You can either have a positive net worth, which means that you have more possessions than debt, or you can have a negative net worth, indicating the exact opposite: you owe more than that you own.

Examples of assets include: real estate, any money in savings or checking accounts, investments and valuables such as antique (don’t bother including your electronics or small jewelry though as these are unlikely to add that much value). Continue reading “Day 2 / 31 – Calculate your Net Worth”

Step 92: Track you progress

Step 92 of the 100 steps mission to financial independence: Track your Progress
Step 92 of the 100 steps mission: Track your Progress

One of the most fun parts of setting goals is seeing yourself getting closer to it with each step that you take. By tracking your progress (and celebrating your victories – something we’ll look at in the next step), becoming financially independent isn’t just a fun end goal, it should can also become a fun journey.

Regardless of your financial goal, whether it is big or small and whether it is a goal for the distant or for the near future, keeping track of how you are doing isn’t just  stimulating and motivating. If you track your progress and keep your tracking somewhere easily accessible and visible, you are also reminded of your goals regularly, which in turn helps you stick to your goal.

Compare the following situations:

  • Situation 1: You decide you want to save $10,000 for a specific goal. The first few days or weeks you feel very motivated and eager to get the money together and you cut out some expenses so you can assign some extra money to your goal. Yet little by little with time you start forgetting about your goal, you stop cutting some of those expenses and within a few weeks you stop putting money aside all together.
  • Situation 2: You decide you want to save $10,000 for a specific goal. You get out a big piece of paper, at the top write: $10,000 for (insert your goal). You decide that for every $10 or $25 you’ll draw a dollar note. You stick the paper in your agenda, on the inside of your bathroom cabinet door or on the fridge. Every time you see the paper you are reminded of your goal and how much you have left to save, which motivates you to take another small step so you can contribute just a little more and draw another dollar note. The more you save, the more motivated you become as you keep seeing the number of dollar note pictures increasing on the paper.

See how different tracking your progress can be in order to actually progress even more and keep up your goal? Tracking isn’t just to see how much you have saved. You can also use this strategy to track how much you have paid off a specific debt. Continue reading “Step 92: Track you progress”

Step 85: Plan your Money Allocation Strategy

Step 85 of the 100 steps mission to Financial Independence: Plan your Money Allocation Strategy
Step 85: Plan your Money Allocation Strategy

A difficult question that many people on their mission to financial independence quickly encounter is “where they should get their money to work for them”: You’ve managed to cut down a little on your expenses, or to up your income or earnings from a side hustle. But the question as to what to do with the extra money you now have remains. Let’s review some of the avenues on how to “make money with your money” that we have looked at on this mission:

  • Paying off debt – saves you money on interest and compounded interested paid over the years.
  • Saving – generates money due to interest received and the power of compounding interest over the years.
  • Investing – generates money due to capital gains, interest received or dividends.
  • Pensions – builds up the income you’ll receive after your retirement age
  • Personal capital – increases your earning potential as a professional or entrepreneur.

These are the most common strategies to pursue in order to leverage what your money can do for you.

But where to start? Say you saved $100 this month and that you are happy to invest this money into your future and future earnings, where do you actually put this money? Which of the above options do you choose? And how do you mix these strategies?

If you haven’t yet fully read the previous steps on the above mentioned strategies, I invite you to read those first before continuing reading this step, to better understand all the pros and cons of each strategy. Just come back once you’re done!

Money allocation

The question of where to allocate your money doesn’t have to imply an “either …or…” situation. You can start investing whilst still having a mortgage. You’ll want to save an emergency fund together whilst still paying off credit card debt. And once you start investing in your personal capital, you’ll likely want to keep that up on a fairly regular basis and the fact that you are investing in the market doesn’t rule out this option. Continue reading “Step 85: Plan your Money Allocation Strategy”

Step 70: Pay off your mortgage

Step 70 of the 100 steps mission to financial independence: Pay off your mortgage
Step 70 : Pay off your mortgage

Now that you’ve been through the various steps on expenses and budgeting, saving, pensions, investing and planning for your future, it’s time to go back again to the bit on debts with one debt in particular which is probably your biggest debt: your mortgage (providing you have one – otherwise you can skip this step). We of course spoke about paying off debt at the start of our mission, but as we said there, since your mortgage has a lower interest rate than most of your other debts, chances are you haven’t yet started paying it down faster.

As commented before many people would argue that a mortgage is a different type of debt and therefore not to worry about as much as they see having a mortgage as an investment. At the end of the day they say, your house is an asset that will probably increase in value over time. I disagree for several reasons:

  •  first of all it isn’t the same type of assets such as stocks and bond that you can just sell to generate some extra money. The only situations in which you can argue that your house is an asset like any other is when you don’t need it anymore for example because you decide to:
    • travel
    • move in with somebody else
    • live in another house that you already own or rent
    • scale down and don’t need a mortgage on a new house
    • live on the streets
  • secondly, you never know when you can sell your house. Some houses are on the market for years, so liquidating that asset isn’t as easy as with other assets.
  • thirdly nothing guarantees your house will truly increase in value or have increased in value by the time you need or want to sell. During the recent house market crash, many houses were sold below their original purchase price.
  • fourthly you are still losing money by having a mortgage in the form of interest payments and you are tied to paying back regularly so until you pay off your mortgage in my eyes this is a debt that takes a big toll on your monthly finances.

Continue reading “Step 70: Pay off your mortgage”