Who doesn’t want to earn extra money?
We daydream about it. To get a bonus, an inheritance, a windfall, an unexpected settlement. To set up a side hustle that earns extra cash. To earn extra money from multiple income streams.
What’s not to like?
But earning that extra money can be a snare if you blow it on stuff or use it to increase your spending habits. Extra money that feels like “free” money, or “found” money can tempt you to think that it doesn’t count, that you don’t really deserve it. So, you might as well spend it.
That kind of thinking can keep you poor!
Remember, when you earn extra money, you don’t have to spend or invest it right away. You can save it until you have time to plan the best way to use it.
Here are 5 fantastic benefits of earning extra income that will help you make that money count.
1. Pay Down Debt
Spending money on interest is pouring it into a pit. Although not all debt is bad, a key benefit of earning extra money is the opportunity to pay down high-interest debt (over 5%), like credit cards.
After you’ve cleared those, consider paying down your mortgage if you don’t have a good rate or if it’s causing you financial hardship. If your car loan is high-interest or will not be paid off quickly, save on interest by paying it off.
And, of course, if you still have student debt hanging around, get that paid as soon as possible.
2. Save for Retirement
You should have a retirement savings plan that you fund each month. When you earn extra money, increase your retirement savings accordingly. Saving for retirement may not seem like a big deal now, but there will come a time when you realize that it’s crucial.
You can increase your contribution to your 401(k) at work, if you’re lucky enough to have one, and use the extra money you are earning to replace it. You should at least be contributing enough to qualify for your employer’s matching contribution.
If you are already maxing out your 401(k) you can set up an IRA (Individual Retirement Account). You can even automate the account to invest a standard amount each month. Consider a Roth IRA, which takes after-tax dollars and offers more flexibility.
3. Create Your Own Safety Net
Even in a good job market, unemployment is always a possibility. With emergency savings available, you won’t be caught off guard if you lose your job. Covering expenses when you’re “between engagements” will be easier.
Moreover, health care costs keep rising every year. So, if you can earn extra money, you will be able to pay for higher prescription costs and unexpected medical emergencies.
In either case, with a safety net, you won’t be tempted to dip into your retirement savings to cover current expenses.
4. Pay Cash
Get into the habit of paying cash for what you buy instead of using a credit card. Even if you intend to pay it off each month, you might get behind.
Paying cash or using a debit card lets you better control your buying habits. You see the money come out of your account right then and there.
For bigger purchases, like a home improvement project or a car, when you earn extra money and save it, you’ll be able to pay cash instead of taking out a loan. In the end, paying less interest means you keep more of your money.
5. Save for Special Goals
If you’re a parent, earning extra money can fund your children’s college expenses, or at least help pay for part of them.
Also, you could use your extra money to start a travel or holiday fund or to save money to renovate the kitchen, build an art studio, or refurbish that classic car. Whatever special goals you have.
The Bottom Line
Earning extra money gives you the freedom to do awesome things if you don’t blow it. Keep in mind the benefits of paying down high-interest debt, saving for retirement, creating your own safety net, paying cash instead of using credit cards, and saving for special goals.