(NYTIMES) – For those lucky enough to have saved more money in the past year, the next question is: What should you do with it?
The big secret to being good at money is that there are only a handful of things you really need to know.
Here are some ideas on getting that financial education started if you were fortunate to have socked away a little extra money.
Create an emergency fund
First, fortify your finances to make sure you’re prepared for a disaster.
Even before paying down high-interest credit card debt or chipping away at loans, if you’ve been able to put away a little cash over the past year, your emergency fund should be your top priority, according to experts.
“You have to have enough to keep your financial life out of the ditch,” said Mr Brian Preston, a certified public accountant, who also recommends that people have enough money squirrelled away to cover a few months of living and healthcare expenses.
Ms Tori Dunlap, founder of the financial advice blog Her First $100K, agrees.
“One of the most common questions I receive: ‘Should I save first, or pay off debt first?’ If this year has taught us anything, it’s the importance of saving an emergency fund.
“So even if you have a good chunk of debt, prioritise saving three months of living expenses first,” she said, adding that she used a savings surplus this year to increase her emergency fund to a year’s worth of expenses.
Tackle high interest
This isn’t the most glamorous path, but it is the one that will offer the highest returns.
After padding your emergency fund to a comfortable level – around six months of expenses, give or take – consider putting any extra money you were able to save towards paying off any loans.
Carrying high-interest debt of credit cards makes the magic of compound interest work against you: In a savings account, the more you save, the more interest you earn, but with high-interest debt, the more money you owe, the more interest you owe.
“The problem with high-interest debt is you’re turning compound interest from being a force for good and turning it against you,” Mr Preston said.
What to do if you still have a little left
If you’re in the position to have a little cash left over at this point, a lot of options open up.
You may also be wondering, given all the recent coverage of “meme stocks” such as GameStop and AMC, if you should invest in individual stocks.
Time and time again, all the data shows that investing in low-cost index funds is the surest path to financial independence. It’s not the most exciting way to invest, but it is, in the long run, the most reliable.
That said, if you want to gamble a few bucks you’d be fine losing, have at it. Just never gamble more than you’re okay losing.
If you’re in the position to do so, perhaps consider donating to those affected by the pandemic.
Maybe just have some fun with your surplus
Ms Erin Lowry, author of Broke Millennial Talks Money, said she and her husband were able to save a surplus over the past year because social events, such as weddings, and a planned international trip were all cancelled. They used that extra money on a major purchase: a car.
“Truly, it was an emotional decision based on the feeling of being trapped through the peak of the pandemic in New York City and that once things opened, even slightly, it didn’t feel like we had a safe way to visit loved ones,” she said. “It turned out to be a prudent decision in several ways, but it’s also a decision we knew we could reverse by selling the car.”
Ms Winnie Sun, managing partner of Sun Group Wealth Partners and host of Level Up With Winnie Sun, said: “Don’t beat yourself up if you can’t invest as much, save as much in your emergency fund or tackle those financial goals because circumstances may be beyond your control.”