The pandemic has forced many Americans to look for extra cash since their main source of income has been impacted by the crisis. A lot of people lost their jobs while others were put on furlough. Though there were companies who quickly shifted to online work which gave people the chance to continue working from home.
The pandemic rippled out from being a health crisis into an economic challenge. Companies were put through a serious stress test and even your personal finances were challenged. If you have an emergency fund, there is a good chance that you already used most, if not all of it to get through the past few months. Just like how CNBC reported that about 46 million Americans almost wiped their reserve fund out because of the pandemic.
But as the economy is starting to slowly open up, you might be getting back to work. Your employer could start to call people back in or your job application could finally go through. It is also possible that if you are freelancing at the moment, you would see a pick-up in your clients. All these could lead to extra cash on your hand which is a good thing.
The next thing you need to figure out is how you can wisely use that cash to improve your finances. One of the best strategies you can do is to be serious in paying down your debt obligations. There is a good chance that your debt obligations are higher now with the health crisis still on-going. You might have incurred additional debt obligations the past few months trying to make ends meet.
How to wisely use your extra cash
There is no doubt that one of the best ways to use extra money coming into your budget is to pay down debt. Here are a few things to help guide you through this.
Prioritize Secured Debt Payments
There are two types of debt obligations – secured and unsecured. The unsecured types are the accounts that usually charge a high-interest rate. This is because it is not tied down to a specific asset that your lender can put a lien on. The most common example would be the credit cards that you lenders extend to you based on credit standing.
Your secured debt is usually your mortgage loan or your car loan. It is normally any type of loan that you took out where you used an asset as collateral. For mortgage, your lender has a lien on your house. The same goes for your car with a car loan. What this means is that your lender can take your asset in case you fail to make the payments on your loan. This assurance allows them to lower the interest rate on the loan.
This is the reason why you might want to use that extra money coming in to pay off secured debt obligations. The last thing you need is losing your assets because you are falling behind on payments. AP news shared that 45% of Americans are setting aside more money than usual. This is a good way of using those extra savings.
Pay down High-Interest Debt
If you are planning to use that extra cash to pay down debts, you can also consider focusing on your high-interest cards. One of the reasons why you might want to do this is to help you save money. Rather than making payments to interest and even fees and penalties in the months to come, you try to pay these accounts as fast as you can.
When you do, you can set aside the amount you would have paid to interest and invest it. Rather than paying interest, you will be making your money work to your advantage. When you invest your money, you can use compound interest to work in your favor. As time goes by, your interest earned gets added to your principal amount. You are essentially earning interest on interest.
Strengthen your emergency fund
One of the biggest reasons why you suddenly found the need to look for extra cash is because of the pandemic. It caught a lot of people off-guard and their finances took a hit. Whatever savings they had were put to the test because several companies had to cut down on their workforce. This is one of the reasons why you need to strengthen your emergency fund.
More than paying down debt, it also helps if you set aside money for future emergencies. If it is your first time to do it, remember that creating a habit is far more important in the beginning. Of course, if you get huge windfall money, you can set aside a sizable portion of that as your emergency fund. But in everything else, start small and build your way back up.
It helps if you can automate the process so you set aside the money even before you use it for impulsive needs. Once you build the habit of saving for it, you can begin to slowly increase the amount you save. You will soon realize that you have built a storing reserve fund even without putting much thought into it. This is because it is already a habit.
Common Mistakes to Avoid
It is really tempting to have extra cash on hand especially at this time. A lot of challenges could have forced you to seriously cut back on your expenses and you might suddenly feel the urge to splurge a little bit. There is nothing wrong with rewarding yourself but the danger is going overboard. Here are a few more things to be on the lookout for when managing extra money in your finances.
Spending all on a family holiday trip
As restrictions start to ease up, you might suddenly feel the urge to bring your whole family out on a vacation. You could be suffering from stay-at-home fatigue that you just want to book the first flight out and spend some time somewhere else. One, it is still not that safe because the virus is still out there. That should already make you think twice about booking exotic locations for you and your family.
One thing you can consider is a staycation so you do not have to go far. Why not try camping out in the backyard with the whole family? This can help you save money and lower the chances of transmitting the virus. You can set up a nice movie you can watch with the family and prepare BBQ for dinner that the kids will enjoy.
Acquiring a new balance on a paid-off credit card
When you start earning extra cash, you might not pay much attention to the way you use your credit cards. This could be due to the fact that you know you have money to pay it back. You could then become reckless and start to use your credit cards again for unnecessary purchases. Next thing you know, you already reached your credit limit on that card that you just paid off.
When you pay off your card, make sure that you do not charge mindlessly on it again. One thing to help you is reworking your budget to make sure you limit the use of your credit cards. You can choose to leave your cards at home. If you stay at home, do not save your credit card details on your computer. This makes it a little more challenging to check out and pay for online purchases.
Having extra cash at this point can be a great advantage but only if you can make the most out of it. If not used wisely, it can bring your finances more problems than you can handle.