Making your money work for you: What to do when you have extra cash

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Depending on where you find yourself in life, it may not have always been easy to set money aside. With high inflation and the cost of living steadily rising, many are struggling to make ends meet, let alone put cash aside for a rainy day. 

But if you do find yourself with more funds in the bank than you’re accustomed to, you may be asking yourself: What should I do with my extra money? 

The answer, like many, isn’t one-size-fits-all. But there are some ideas that, when taken together, can put you in good financial standing and set you up for success over the long term. 

A great option for growing your money is to put it aside in a savings product where it can earn interest. Unlike checking accounts, which simply hold onto your money for you without paying you anything in return, savings accounts give you the chance to earn interest on your funds — essentially allowing you to make money with your money. With interest rates on the upswing right now, you’ll likely be earning a favorable rate with most banks.

A typical savings account or passbook allow you to earn market interest rates on your money, but don't always let you withdraw money for free. The same goes for a fixed-term deposit account. Here, you put a designated sum into the account, agreeing to lend it to your bank at a fixed interest rate for a predetermined period. The advantage here is that their interest rates are more favorable than other types of accounts — perfect for money you don’t need right away and want to grow in a secure way. 

If you’d like to have predictable access to your cash, consider an easy-access savings account. These accounts allow you to earn interest and still access your money at any time. This can be a great place to save for the future, or to stash your emergency fund. As always, it's important to read the fine print and check any fees you might incur before taking the plunge. 

Life is full of surprises. And though that may mean loads of fun and adventure, it can also mean massive disruption. It’s important to be prepared for when the going gets tough — and the best way to do that is to have an emergency fund. 

Basically, an emergency fund is money you set aside for an unforeseen event when you’ll need extra cash, like a job loss, medical issue, housing or appliance woes, etc. The idea is that when you need money quickly, you have it ready. The normal advice is three to six months of living expenses, but that’s just general guidance. 

For the sake of convenience, you should place your emergency fund at the same bank where you have a checking account — either in its own savings account or a sub-account of some kind. If you want to grow your emergency fund until you need it, you could consider placing it in an easy-access savings account. This way, you’ll earn interest on your funds and can access them at any time. 

If you’re struggling with debt, you’re not alone. According to Statista, the average volume of debt in Europe adds up to $26,000 per person. Whether it’s student loan debt, a mortgage, or credit card debt, it’s best to take care of it sooner rather than later. Generally, the interest you pay on debt will eat into your savings and extra cash, so it’s important to focus on paying it off once you have the basics like an emergency fund set up. Paying down high-interest debt should be a big priority if you have extra cash. If you’re not sure where or how to start, frameworks like the debt avalanche method or debt snowball method can help.

Perhaps you already have a plan in mind for your money: a new kitchen, a car, or even a downpayment on a home. Or, maybe you don’t know which — if any — of these you’d like to invest in, but want to make a large purchase or even plan a big trip or event down the line. 

Regardless of what you’re saving for, it’s worth formulating a plan when you’re saving for a concrete goal. Here, the time horizon can make all the difference in terms of how you want to save and what level of risk you feel comfortable taking. 

If you want to set money aside towards a straightforward goal over the course of a few months or years, you could do this in a simple savings or sub-account, or try a fixed-term solution to earn a higher yield. If you have a longer time horizon and can handle some risk, you could consider investing in stocks or bonds to potentially reach your goal more quickly — more on this below. 

Investment is risky, but it can also be a powerful way to put your money to work. The positive thing is that investments exist on a continuum. This means you can determine your own risk profile and adjust your investment strategy accordingly. 

Government bonds and securities are generally considered to be on the safer side, but may come with slightly lower returns. Stocks are known to be riskier, but have historically shown to have steadier returns over time than newer types of assets such as cryptocurrencies.

The mix that’s right for you depends on your age, risk tolerance, and financial situation. Some people may be comfortable allocating 100% of their leftover cash to stocks, while others may prefer a more traditional mix of 60% stocks and 40% bonds.

It’s worth noting that you don’t need to choose individual stocks. Instead, you can invest in exchange-traded funds (ETFs) and/or index funds that track an index of a wide range of stocks and other investment products. This may be less risky, as you’re broadly spreading your investments across the market, rather than putting them into a single company. But bear in mind that all investments do carry some level of risk, so it’s better to only invest money you’re comfortable potentially losing. 

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