Extra Cash? Should You Spend It, Save It or Pay Down Your Debt?

March 28, 2012 by  Filed under: Credit 

With tax season upon us, most of us are looking forward to receiving a nice tax credit from the government. The question is, what should you do what that money? Should you spend it on that “thing” you have been wanting but possibly do not “need”, save it or should you use it to pay down some of your looming debt? Most experts will tell you that you should actually do a little saving and a little paying down of debt. That means put the desire for spending on the back burner if you want to get ahead.

“Paying down your debt should always be your first goal,” says James Smith, my financial adviser. “This being said, you should also try to put some of that money away for a rainy day if possible.” By covering off both your debt and savings needs, you will find yourself in the black which will result in much less stress and many more happy times!

Check out these tips to see which best apply to you:

1. Create an emergency fund

You just never know when you are going to need some emergency money. Keys to making this work are to be sure that you cannot access this money through your debit card. The harder it is to access, the better chance you have to actually have it when you need it. Research the different interest-bearing accounts with your bank to see which one is going to be the best fit for you.

2. Pay down your debts

Get those debts in check, pronto. Money paid to debt today will save you money in the future in the way of lower interest payments or better yet, no interest payments.

3. The 5 account rule

Although many people do not follow this plan, the rule of thumb should be to have 5 separate accounts. Five? Yes, one for the “rainy” day or “fun” money, the emergency fund mentioned above, bill money (used to pay your bills), retirement fund and an investment fund. This will help keep your expense money separate from your spending and saving/investing money.

4. 10% savings rule

This rule states that you should do your best to save 10% of each of your paycheques into your savings account. This will ensure that your savings grown on a bi-weekly basis.

5. Invest in a non-registered mutual fund

These accounts are great because they do not require a large investment to get started. You can invest as much or as little as you can monthly. This account will return higher interest than a regular bank account which means your money will make more money. Because these mutual funds are not registered, you can also withdraw from the account without paying fees.

6. Invest in short-term GIC’s

This a great option if you aren’t feeling pressured by high levels of debt. Like the non-registered mutual funds, you get back whatever money you invest in the GIC. Like their title says, these investments are short term. You can invest for 6, 9 or 12 months. If you don’t need the cash right away, you would be best to leave your money in the GIC as long as possible to maximize your interest rate on the investment. When the term is up, you have the option of cashing in on the interest or you can roll the interest back into the investment.

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