When was the last time you had a significant amount of disposable income? Maybe when you were 12 and you got a nice check from your grandparents for your birthday. Or maybe it was the last time you got a fat tax refund. For most people, disposable income is hard to come by. But for others, like high net worth individuals, disposable income is the norm. Either way, if you ever have some extra cash lying around, what should you do with it?
Consider Your Financial Goals
That’s a very broad question, because there are so many options. The reality is, it all comes down to your own personal finances. What are your personal goals for your financial situation? Of course, you could blow all that money by splurging on something you’ve always wanted, like a motorcycle, or a new boat, or use it as a down payment to remodel your home. Or, you could use the money more responsibly. Two of the best things you could use your disposable income on are investing or paying off debt.
Eliminate Debt or Invest in the Future?
Both of these options are smart. They might seem a little boring. But instead of splurging on something you probably don’t really need, you could use the money to get out of debt or invest in your long-term financial future. So which option is better? If you only have enough disposable income for one or the other, which one should you choose?
Important Things to Consider
As with many questions in life, there is no simple answer. Everyone is different so there is no one-size-fits-all response to this question. But here are some ideas that could help you make the right choice for your situation.
Start with cash flow – if you have enough steady cash coming into meet your regular living expenses, then it might be a good time to invest that extra money. On the other hand, if cash is always tight and you can barely keep up with your monthly payments, it’s probably wiser to put that extra cash towards relieving some of that debt.
What about debt – not all debts are equal. Some debts cost you a lot of extra money thanks to high interest rates. On the other hand, other debts are not nearly as bad, like a mortgage. You get to deduct your mortgage interest payments from your taxes so that helps reduce your overall interest rate.
Consider your investment opportunities – there’s no really bad time to start investing. For some people, the end of the calendar year is a great time. For example, you could invest in your personal retirement account. Any extra money you have right now could go toward fully funding your IRA for the year. If you haven’t maxed out your annual contribution amount, now is a good time to do it. You could wait till April 15, but why wait if you have the money now. It mightbe gone by April.