“Hi Tash, I often hear that I should have an emergency fund which could be three months to a year of my expenses. Does that mean when I have more than this I should be spending, or investing, the money?”
Well, most people tend to want to dive in head-first into investing (or spending!) their money, without really having a plan, so I’m glad to hear you asking the question first!
In fact, most Aussies have no savings, which means in the event of an unexpected expense or loss of income they struggle to pay the bills. This is why emergency savings are so important! Having three months of living expenses saved up for an emergency is a great starting point. If you can afford to save some more – that’s great! It’s up to you how much more you set aside and will often depend on the circumstances as to how much you are likely to need. This money is often best kept in something low risk like an online savings account, or if you have a mortgage, an offset account, so that it’s readily available if you suddenly need it. Once your emergency funds are taken care of the question is, what to do with any surplus cash?! Here are some options:
Option # 1: Pay down any non-deductible debt
If you have outstanding funds on a credit card, a car loan or a personal loan, you can direct any surplus funds there. It’s always wise to pay off your debts before you start looking at other options for your money.
Option # 2: Make extra repayments on your mortgage
Once interest rates start to rise, would you be able to afford to make higher repayments on your mortgage? If not, I would focus on paying down the mortgage (while rates are still low!) to a level you could afford to repay when rates go up. Check out our handy calculators to help you plan your repayments.
Even if you could afford the rate rise, it is still a good idea to take advantage of the currently low rates by paying off extra – not only will you not have to worry about adjusting your lifestyle to afford the higher repayments when rates move, you will also be knocking down your debt much quicker in the meantime.
Before you start making extra repayments make sure you check the rules with your bank regarding any restrictions or penalties for extra repayments (especially if you are on a fixed rate) and talk to your accountant if there’s a chance your home could become a rental property down the track.
Option # 3: Think about your goals!
When your debts are under control, your savings are built up and you still have some surplus cash, what comes next is up to you! For most people this will involve some combination of investing, growing their super, or splurging. It all depends on your goals so start by jotting down some short and long term goals and assigning dollar values to them, and then working backwards from there. Check out some of our previous blogs on investing for some inspiration and guidance in coming up with a plan.
Option # 4 : Join our club!
If you would like a helping hand with setting goals, mapping out plans and learning more about managing your money, join our Making Cents of Money club! For a small one-off fee you will get lifetime access to online learning materials and live group coaching in our private Faceook group. Check it out here for more info.
I hope that has helped give you some clarity around what to consider when making your decision. Good luck!
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The information provided by Women with Cents is general in nature. It doesn’t take into account your objectives, personal financial situation or needs. Think of it as educational material in which to help you make more-informed decisions. We recommend you obtain financial, tax and credit advice specific to your situation before making any investments or financial decisions.
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