What to Do With Extra Money

Extra cash is great, but what should you do with it? Investing is often the answer.

Alana BensonMay 9, 2021
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Despite the massive economic toll the coronavirus pandemic has wreaked on many people, others may have added some unexpected cash to their bank accounts. According to a Pew Research Center study, about 42% of Americans say they've been spending less money since the start of the pandemic. Decreased spending, tax refunds, relief checks and unused vacation funds may have given you a surplus of cash — and a pending decision about what to do with it.

If you've accrued some extra cash because of the pandemic or another reason, here are six ways to use it to help take your finances to the next level.

1. Create or build up an emergency fund

If 2020 taught us anything, it's that the unexpected can happen, and it pays to be ready for it. The first step you may want to take with any extra money is to ensure you have a financial cushion for when those unexpected events come around. To make this money extra effective, you can put your emergency fund into a high-yield savings account. That way, your cash may benefit from a higher interest rate, but you’ll still have quick access to it.

2. Get your 401(k) match

If you’ve been holding off on investing in your 401(k), now is the time to start — especially if your employer offers a match. Say your employer offers a full 3% match on your contributions and you make $50,000 a year. If you contribute 3% of your salary, or $1,500, your employer will also kick in $1,500, upping your total annual 401(k) contributions to $3,000. If you don’t have access to a 401(k), don’t worry. There are still plenty of ways to invest for your future.

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3. Pay down high-interest debt

If you’ve got extra money lying around, you might as well use it to save yourself money in the future. If you carry a balance on a credit card or loan and have a high interest rate, your best investment may be to pay off that balance. Generally speaking, if your interest rate is higher than you can expect to earn in the stock market or any other investment, you may get a better return on your money by paying off that debt.

4. Start funding an IRA

If you don’t have a 401(k) or you’ve already contributed enough to get your employer’s matching contribution, consider investing through either a traditional or Roth IRA. Individual retirement accounts aren’t investments; they’re specific types of retirement accounts that come with tax advantages, which you can use to buy investments. Contributions to traditional IRAs are often tax-deductible, and Roth IRAs allow you to take out qualified distributions tax-free in retirement, which means you don’t pay taxes on your investment earnings. Once you fund an IRA at an online broker, you can start filling it with investments. It’s often considered a good idea to primarily invest in diversified funds such as mutual funds. Funds are made up of many different stocks or bonds, so if one company doesn't perform well, your portfolio is buffered by the other companies you’re also invested in.

Both traditional and Roth IRAs have contribution limits, so you can contribute only a certain amount each year. For 2021, that amount is up to $6,000 (or $7,000 if you’re 50 or older). IRAs also have limitations on who can contribute. For both types of IRAs, you must have taxable compensation, and for Roth IRAs, you can contribute only if your modified adjusted gross income is below certain thresholds.

If you don’t want to choose your own investments, you can open an IRA with a robo-advisor. Robo-advisors use computer algorithms to build and manage an investment portfolio for you, usually for a fee of between 0.25% and 0.50% of your assets under management.

5. Save for your other money goals

According to the Pew Research Center, about half of nonretired Americans say that the economic impacts of the coronavirus pandemic will make it harder for them to achieve their financial goals.

Retirement isn't the only thing in your future — take some time to outline what you want your money to do for you. Do you want to save for a down payment on a house, or start a college fund for your kids? Goals that are at least five years away can typically involve investing at least a portion of your savings so that money grows. For short-term goals, it's often wise to keep the money close at hand in a savings account where you won't risk losing your principal.

6. Explore additional investment options

Once you have investments that set you up for the long term, you may want to start expanding your repertoire.

If you’re looking to buy individual stocks, you can research companies you’re excited about and believe will perform well in the future. If you’re interested in real estate, you could explore investing in real estate investment trusts. REITs are companies that own or finance income-producing real estate. Many REITs trade on stock exchanges, so you can buy them within your IRA or a taxable brokerage account.

To have your investment dollars go toward causes you care about, you can look into sustainable ESG investments. If you’re intrigued by the constantly evolving space of alternative investments, you could consider cryptocurrency.

While these investments may be more exciting than your other investments, they should generally make up only a small percentage of your portfolio — they often carry a higher degree of risk than more diversified investments like mutual funds.

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