It’s always nice when the opportunity to earn some extra cash presents itself. This could be anything from the opportunity to work overtime at your steady job to earning money from something you consider a hobby. For example, I am spending this weekend performing with the local symphony. I have a music performance degree and while I don’t even come close to earning my entire income from performing, the few hundred dollars that this kind of gig pays does provide a nice supplement from time to time.
In addition to my extra income, my wife picked up additional work last month and will receive her payment just in time for Christmas. She is a college professor and was paid a few hundred dollars to review a publisher’s new textbook. I’m not sure if she enjoyed reviewing that textbook as much as I did playing, but if she did, I’m not sure I’ll ever understand!
So how should you handle unexpected income? This will depend on the current state of your finances and your future goals, which may be very complex. Ross Perot once stated, “I’ve never ever tried to give people financial advice through the newspapers — I’m afraid they’ll listen to me.” He continued saying, ”I’d need to look at each and every person or business situation under a microscope.” With that in mind, here are three simple options that we considered:
Apply It To Your Outstanding Debt
If you are carrying several thousands of dollars in high interest debt, it makes sense to pay this debt off as quickly as possible. It doesn’t make much sense to stash your money in a savings account earning 2% when you are being charged 13% (or higher) on your credit card balance. (Even if you have no credit card or other high interest debt, you might consider paying off those old student loans that are still hanging around. Over the long run you might be able to earn a higher rate of return in the market, but the peace of mind gained by being free of debt can be priceless.)
Save or Invest
If you are debt free, or at least “high interest” debt free, you could save for a rainy day by funding 3 to 6 months of expenses. You could also save for a future big item purchase such as a down payment for a home, or invest for your future by placing your money in real estate or the stock market. After all, if this extra $500 were to earn an average 10% return in the stock market over the next 40 years, it would be worth over $26,000.
Spend The Money (Afterall, you earned it!)
If your financial life is in good shape, then enjoy what you’ve earned! I’ll eventually post what I consider financially fit, but for now, let’s assume you have no high interest debt, live on a budget that works, and consistently spend less than you earn. Just make sure you avoid the temptation to buy that $1500 plasma TV if your unexpected income only totaled $1000.
Again, these are only three options that you might consider. Personally, we decided to throw our extra income at my student loans in an effort to accomplish our current goal of becoming debt free.
