I recently saw the following post on a personal finance blog:
“If you are generating a little extra income, where would you put the surplus?
- Pay off your mortgage
- Pay off outstanding credit card debt
- Invest in IRA [(401(k))]
- Invest in IRA and kids
- Go on a family vacation
- Start an emergency fund?
“I would say that it depends on your individual situation…If your mortgage is at a low rate (which it should be now) and your income is high, probably best to leave the mortgage and place the proceeds in the IRA… If you have outstanding debt at high interest rates, best to get rid of that as quickly as possible…”
While the blogger’s question about what to do with surplus money is certainly a very good one, his suggestions are pointless. Here’s why:
There is no way to know what to do with surplus money until you have a spending plan in place and have come to trust yourself in tracking your expenses (every day) according to that plan and have learned to
live with it…for at least three months. Your spending plan will reveal to you all kinds of things about your priorities, values, and emotions that will help you determine where the extra money should go. Of course everyone’s situation is different, so no one can give a blanket statement about where the money should go.
What I always tell my clients is to dump all money into a Wealth Accumulation Account (WAA). Everything goes into this savings account and then is spent out from there according to the spending plan. If you spend out of a checking account, any extra money ends up being frittered away because you haven’t determined beforehand, through a plan, how the money is to be spent. Until you examine your spending plan and make that decision, it sits in the WAA, safe, earning interest. Then you can make the right move for your particular situation from there.