As many of us begin bringing in more money this summer than we are used to during the school year, you may be wondering what to do with this extra money. The answer really depends on your situation and goals. Your first step is to get clear on your financial goals and budget, after which there are four main options on what to do with your surplus that we will explore. If you have met all your financial obligations (car payments, minimum credit card payments, rent, etc.), first of all congrats and second let’s help you understand your best options for that money.
- Save
One of the things you can do with extra money is save. This may look like funding an emergency fund by putting 3-6 months of expenses in a savings account. An emergency fund is important because it is a buffer between you and life in the case of flat tires, medical emergencies, and so much more. Beyond emergency funds, there are many other things you may want to save for upcoming costs like school or trips and other fun things, home down payments, and the list goes on.
- Pay off high interest debt
Once you have saved $500 or more in an emergency fund, another good use of your surplus may be paying off any high interest debt. We recommend paying off any high interest debt like credit cards or pay-day loans, before investing or increasing your spending. It doesn’t make sense to invest for a potential annual return of 8% when you are paying 18% or more in interest on your credit card (these numbers are used for illustrative purposes only). In this scenario, you would automatically be losing 10% no matter what. Depending on your goals and financial philosophy, this debt payoff may or may not mean all debt.
- Invest
As students we often hear about the benefits of compound interest (earning interest on interest) and how we need to start investing to take advantage of that interest. We are told that investing will help us reach our financial goals (which it potentially can). Additionally, we may be facing pressure to invest from others or ourselves and sometimes we may feel like we are already behind where we “should” be with investing. Even with all the pressure you may be facing, it is important to be smart about how you invest and make sure you have met the criteria above.
Investing is the process of giving money or resources with the expectation of a larger amount of money returned to you at a later time. However, this return is rarely, if ever, guaranteed. Before you invest, it is important to understand that you may lose rather than gain money and make sure you are financially ready. If you have an emergency fund and have met your other savings needs, that is great! You may be ready to start investing. You just have a few more steps to make sure you are investing smart.
a. Set goals and manage risk- Will you need the money in a short or long time frame (time horizon)? What are you specifically saving for? Setting goals will help you know how much risk you can and should take (risk capacity) to achieve your goal. Risk tolerance is another important question to answer. What is your risk tolerance? It is important to not be too risky or to not take enough risk. Find where your sweet spot is – the risk level that will not keep you up worrying at night. There are many different risk tolerance quizzes online, try a few if you are not sure of their results. Once you understand your time horizon, risk capacity, and risk tolerance you will have a better idea of what to invest in and what strategies work best for reaching your goal.
**If you plan to make frequent trades (day trading) on apps like Robinhood or Stash, use fun money and do not count it as saving/ investing. Day trading is considered speculating rather than investing, which normally is intended to last months or years. While day trading can lead to massive gains, it can and more often will lead to (potentially massive) losses and tax consequences.
b. Decide on an investment vehicle (mutual funds, ETFs, etc.) and check its fees (the lower the better).
c. Diversify- After you decide what kind of investment vehicle you plan to use then you can decide on the investments (stocks, bonds, etc.). After you know what you will be investing in, make sure it is diversified or that there are a variety of investments within your holdings to help reduce risk. The warning ‘not to put all your eggs in one basket’ comes to mind.
4. Increase Spending
If you have an adequate emergency fund, met your other savings goals, and have paid off high interest debt, then you may have room in your budget to increase spending. This option gives you permission to spend some of your surplus as you see fit and enjoy your money in the present. Sometimes you have the capacity to spend more on things you enjoy because you have already put yourself in a good situation financially with adequate savings, are making progress towards your financial goals, and paying off high interest debt. Managing your money is a balancing act between present and future spending, sometimes you have the ability to spend more in the present without harming your financial future.
If you have questions and want help thinking through what makes sense for you, set up a free appointment with Powercat Financial. We can also help you find out how much you need for college, understand your student loans, learn to budget, etc. Powercat Financial is available for online or phone financial counseling sessions which may be requested via our website link at www.k-state.edu/powercatfinancial. Also check out YOU@KSU for additional personal well-being help.
Ana Sanko
Peer Counselor III
Powercat Financial
302 K-State Student Union, Third Floor
918 N. 17th Street
Manhattan, KS 66506-2800
785.532.2889
www.k-state.edu/powercatfinancial
