How to Invest Your Extra Cash
If you have a windfall burning a hole in your bank account, here’s how to invest extra cash for financial success—whatever that means for your unique situation.
It’s been a good month. Maybe you’ve been putting in extra hours at work and the boss noticed. Maybe your side hustle is finally raking in some money. Maybe you’ve just been spending less and noticing the positive results for your bank account.
Either way, you have some extra cash burning a hole in your bank account (hey, stranger things have happened!) You could spend it on something fun, but you’ve decided to do the financially responsible thing instead.
Trouble is…you don’t know where to begin.
For those who want to put a windfall to work, here’s how to invest extra cash for maximum gains.
Pay Down Debt
We’ll admit that paying off debt isn’t as exciting as dropping cash on the next up-and-coming tech stock, but it’s one of the most financially responsible things you can do. And while you might not think of paying off debt as an investment, it’s a valuable investment in your future.
Debt is basically the inverse of investing. Investing grows your money through compound interest over time. Debt eats away at your money through compound interest—the debt you owe grows by virtue of interest, which means you actually owe more than your initial balance. The longer it takes to pay off, the more you’ll pay in interest.
So if you have spare cash laying around, do your future self a favor. Throw it at your debt. It doesn’t matter what kind of debt—student loans, mortgage, credit cards, you name it. Just keep chipping away at what you owe. Every dollar you toss in now is one less dollar you’ll pay in interest.
Boost Your Emergency Fund
If there was one lesson from the waking nightmare that was the entirety of 2020, it was that the unexpected can strike at any time. That lesson revealed just how vulnerable many households are to loss of income—40% of Americans are just one missed paycheck away from poverty. Just 39% of Americans say they have enough savings to cover a $1,000 emergency room visit, while 44% of people said they could not even cover a $400 emergency medical bill.
If that sounds like you, throw your extra money at your emergency fund.
Financial experts recommend that you should have enough emergency savings to cover three to six months of living expenses. The exact number depends on your living expenses.
For an emergency fund, the best investment option is a high-yield savings account, which is a type of savings account offering a higher APY than traditional accounts. According to the FDIC, the national average savings APY rings in at a meager 0.04%. The best high-yield savings accounts hover at around 0.5% APY. It’s not much, but it’s way higher than a regular savings account, and you’ll still have easy access to your cash in a crisis.
Contribute Toward Retirement
If you’ve been holding off on retirement investing and find yourself with a windfall, now is the time to throw that spare cash at retirement—especially if your employer does matching contributions.
If you have an employer-sponsored 401(k) plan, you should sign up ASAP. If you’re already signed up, you should be contributing as much as you can afford, and you should take your employer up on their matching contributions. For example, let’s say you earn $50,000 per year and your employer offers a 3% match. If you contribute 3% of your income annually ($1,500), your employer will also toss $1,500 into the ring. That adds up over time.
If you don’t have a 401(k), now is the time to start funding an individual retirement account (IRA). Even if you have a 401(k), opening an IRA is a good idea. It gives you different control over your investment assets and different tax advantages than a 401(k), and you’re allowed to hold both at the same time.
Not sure where to open an IRA? The easiest route is to set one up with a robo-advisor. Not only can you set up an IRA with minimal hassle, but the robo-advisor manages the account for you, so you don’t need to worry about learning the ropes of IRA investing. This will give you a passive (and thus more conservative) investment strategy, but it’s still a big improvement over no IRA.
Invest in Something You Love
If your investments are in good shape and you’re comfortable with managing your own investments, why not use your windfall to diversify your portfolio and invest in something you love? Let’s be honest, stocks and bonds are useful as investment vehicles, but unless you’re a broker, they’re not exactly a recipe for joy. And if you like something, you’re more likely to use it regularly.
This is not a carte blanche invitation to invest in something exotic just because it looks fun. Do your homework on investments that interest you, figure out how they can benefit your portfolio, and decide if it’s the right match for your investment style.
Here at Masterworks, we’re big believers in blue-chip art investing. Art has long been used as a hedge against inflation, and it’s great for gains—in fact, blue-chip art has outperformed the S&P 500 by 180% from 2000 to 2018. And on our platform, you can use your windfall to start a membership and buy shares in blue-chip art starting at just $20 per share.
Don’t Try to Get Rich Quick
Above all, do not try to use your windfall to get rich quick. That’s not how investing works. Investing is a marathon, not a spring. Your extra cash is a great way to bolster your investments, but you’ll see those gains years down the line. Be patient and precise. Your future self will thank you.
Figuring Out How to Invest Extra Cash?
When it comes to investing, every little bit counts. So if you have extra cash, figuring out how to invest extra cash properly can turn into real gains down the line if you’re smart about it. And if you’d like to use your extra cash on blue-chip art investing, we’re here to help make it happen. Fill out your membership application today to learn more.