Thursday, March 26, 2009

GOT EXTRA MONEY - WHATS THE BEST WAY OF USING IT??

We all get lucky with money once in a while. Sometimes we get unexpected bonus at work , while at times we get gifts from relatives or some investment maturing etc gets us cash surplus. So what should you do with the extra cash that you have. Here by the term extra cash I intend to mean the cash flow which was not accounted for in your household budget. Now getting back to the issue of deploying it to the best use. Should we buy stuff for us like LCD TV/Fancy Laptop etc or should we go on vacation to Miami or should we buy a new car or should we invest it for rainy day or should use it pay off our bills?? The answer to this will depend on the amount of money that we have at our hand. Large amount of money can help us do all of the above . But, what if we have limited sum of money and we want to get the best out of it.

I suggest that we put our money to use in the following order:
1. Pay off your credit card debts first - Since credit card debt is the most expensive debt to have in the world, it makes lot of sense to pay off this debt first with the extra cash.
2. Pay off other debts- After getting light on credit card debt, use this money to pay off other debts like personal loan, education loan, mortgage etc. We should start by paying off the debt which is smaller in value and then go for the next bigger debt. this will encourage us to keep knocking off loan accounts in future as well.
3. Build an emergency fund - After you have paid your debt, if you have some money left, then use it to build an emergency fund for yourself. This could be equal to at least 6 months of your household expenses.
4. Invest - After providing for emergency fund, if you have some money left then invest it based on your investment strategy.
5. Pay yourself - After doing all this if you still have money left , then I think you would really want to celebrate this and then you might consider paying yourself for vacation etc.

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