Disposable income and debt are two words that usually do not belong together. But it is not impossible to have them in your budget and manage your finances well. Remember that having debt in your finances is not the end of the world. In fact, a lot of people are able to properly balance and manage debt accounts.
If you are able to utilize debt properly, it can even help you improve your life and bring you closer to your goals. Take your mortgage loan for example. There is no denying the fact that it could easily be the biggest debt obligation you will ever have. But if you manage it well and stick to your payments, it will help you buy the house of your dreams.
Student loans you pay for your cost of attendance in college or even for higher education also have the same effect. If you manage it well and take out and borrow only what you need, it can give you the chance to land a great job. Even credit cards can be used to help you budget better. But all these require you to manage your debt payment well.
Especially now that CBS News shares that about 45% of their respondents are setting more money than before. This means that there is a higher chance of seeing some disposable income in your budget than before. With that in mind, what is the best course of action if you have debt payments and some extra funds in your budget?
How to use your Disposable Income
If you are wondering how you can best use your extra money to good use, here are some options to consider. Remember that your specific financial situation will be different from the people around you. That being said, what might work for them will not exactly yield the same results for you. So when choosing how to use your disposable funds, keep in mind your current situation first.
Pay-off that Debt
The most common use for your disposable income is to divert it towards debt payment. It feels good whenever you pay off a debt account. Regardless of the amount, it is a mental win that can push you to do more. This is why some people choose to pay off a small amount to help get them started and be able to focus on bigger payments.
When you choose to pay down your debt, keep in mind that there are several repayment programs to help you strategize. One is to focus on paying down the smallest amount first as mentioned earlier. More than just the mental boost, it gives you the chance to free up some funds in your finances as well. You can choose to use that fund to pay down the next debt account or put it towards your emergency fund.
Another strategy is to focus on your payments with the highest interest rate. Choosing to pay it down faster gives you the chance to save money in the long run. Rather than having to pay interest for a longer time, you can use that money for other purposes. It can either be paying down other debt accounts as well or saving for the future.
Increase your Emergency Fund
If there was one thing that the pandemic was able to remind people of, it was how important an emergency fund is. The health crisis left a lot of people struggling financially especially the ones who lost their jobs. Pew Social Trends shared that about 25% of US adults shared that either they were laid off or someone in their household lost a job due to the health crisis.
If there ever was a perfect time to use your emergency fund, losing your job should be on top of your list. Your emergency fund is supposed to cover your expenses while you look for a new source of income. It can be looking for a new job, exploring side hustles, or even setting up a business idea you have in mind.
This is why using your disposable income to double down and strengthen your emergency fund makes a lot of sense. The health crisis proved just how important an emergency fund is. The fund can also help you stay away from debt which is challenging to get out of if you are already having difficulties with your finances to start with.
Invest your disposable income
The best way to make your money work for you is to identify investment opportunities. There is a lot to choose from but the first thing you have to understand is your risk tolerance. You have to understand that there is always risk involved with any type of investment. This is the reason why you should always look into every investment you make.
One general rule when it comes to investments is to take on less risk as you get older. This is to help keep your earnings intact as you slowly ease into retirement. If you continue with high-risk investments, you run the risk of losing what you have earned over the years. When that happens, you might have a difficult time starting from scratch and when you are older, this becomes a challenging task.
What to avoid
Now that you have an idea of how you can best use your disposable income, it also helps to know some of the things you need to avoid. Here are some of them to keep in mind.
Unnecessary purchases
When you have disposable income in your hands, it is easy to start thinking about the things you want to buy. That dress now seems like a good idea. The idea of buying a new pair of shoes starts to invade your thoughts. Even that exotic vacation seems to be much easier now because of the extra money you have in your budget.
Be in control and resist the urge to spend your extra funds for expenses that will not help you with your finances. There is still a pandemic ongoing and it is a good idea to curb unnecessary spending and stick to basic needs. If you do have extra money at the end of the month, think of ways to strengthen your finances for future needs.
Make your money inactive
If you keep your money in a box in the attic for years, there is a good chance that inflation will catch up and lower the buying power of what you have saved up. Yes, saving is important but you need to be smart about it as well. At the very least, a regular savings account can help you get some interest earnings on your money but it would not be enough to compensate for inflation.
This is why investments were discussed earlier. It helps you grow your money over a long period of time. You can also look into a high-yield savings account. As the name suggests, it functions much like a regular savings account but it comes with higher interest earnings. It is always best to spread out and diversify your investments so you can mitigate risk and maximize returns.
Having disposable income at the end of every month can give you the chance to strengthen your finances for future emergencies. Make sure to make the most out of it so you can get through tough situations in the future.
