Saturday, March 29, 2008

What Should I Do With Extra Cash?

It's a crazy time right now, financially speaking. Even the high-yield savings and money market accounts are currently only paying about 3% APY. The stock market is like a roller coaster lately, but even on its high days it's lower than what it has been in the past year and a half. But neither issue is causing me to pull out because my long-term investments will just ride it out. My short-term funds can just stay where they are -- although I'd love to think they could do better than 3% since the current rate of inflation is 4%. However, it is better than nothing at all.

So if you are fortunate enough to have some extra cash right now, what should you do with it? I'm not a financial planner, so you better do your own research for yourself before deciding what to do...but here's what I think:

For long term investing, you could take advantage of dollar-cost averaging and continue to put money into the stock market. Basically, I see it as a sale on stocks! Of course, you do run the risk of buying on sale only to find out that they've lower the prices even more. (So, you lose money until the share prices head north again, and you are assuming they will actually do that -- but of course, historically speaking, the over all market will rise again.) However, that is the whole idea behind dollar-cost averaging. And it's why the stock market is for long-term investing.

For the short term, you could look at plowing extra cash into paying down debt. More than likely, the interest you are paying on a credit card or car loan is higher than the 3% you could earn in your high-yield savings account. So, put the money into the loan instead. There will then be less time that you are paying that higher interest rate. If you want to see how much you could save by paying off your car loan early, check out this auto loan early payoff calculator. And here's a calculator for credit card payoff.

Remember: you have to look at your complete situation and consider things like whether you need to increase your contribution to your retirement fund or start or increase an emergency fund. But if you are set in all of your other areas and have a bit leftover (which I hope you do), think about what these calculators can tell you about saving. You don't have anything leftover? Think about ways you can lower your expenses and/or increase your income. Save 4 Fun gives you great ideas on how to get started!

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