Got extra cash? Is it better to save it or pay down credit card debt?

What to do with extra cashWhat would you do if you came into some extra money today? Would you pay down some of that looming debt, or would you stick it in the bank to earn some interest? Obviously it would depend on the amount of your sudden windfall, but experts say the best thing to do is... both.

"Getting rid of that debt should be everyone's first goal," says Bill Christie, retired personal accountant and finance adviser. "But one should always stick a little aside, both for savings as well as for a rainy day."

But what if you're unemployed with a fair amount of debt? What if you are employed but have your eye on that special something in the shop window? Here are a few suggestions Christie offers that may help in any of these situations.

Take care of debt. The first thing anyone should do with a bit of extra cash is to get those debts in check. If you only have a small amount of debt, pay it off. If your debt is a little deeper in the red, pack on enough to get yourself ahead, then keep a bit to save. "It may not make sense initially," Christie says. "But if you're in a situation where you won't know when the next paycheque or windfall will be coming, pay enough to get you a bit ahead, then sock the rest away."

The 10 percent fund. A great option for those who have debt that is in control is to create a fund where you put 10 percent of each cheque (or bonus money) into it. "Typically, folks should have five accounts: a rainy day fund (money for fun), an emergency fund (money for unexpected bills or emergencies), a bill fund (money for monthly expenses), a retirement fund and an investment fund," Christie says. "The 10 percent fund would be the rainy day fund. Not everyone can do all of these accounts so, for the average Joe, as long as the expense money is kept separate from the spending money, and Joe has at least one savings account, he'll be fine."

Create a small emergency fund. This would be the place to sock a bit of that money away. Most banks have interest-bearing accounts where you could deposit the money, just be sure that cash can't be accessed by your debit card. That way you won't be tempted to touch it until you really need or want it.

Start up a non-registered mutual fund. These accounts are great because you can start one up with as little as $25, and continue investing that same amount each month. When you have more money on hand, you can put more into it; when you have less money, you can cut back. Christie recommends such accounts because "you get much higher interest than with regular bank accounts and, because they aren't registered like an RRSP, you can take money out of them without getting dinged with fees."

Invest in a short-term GIC. These are perfect accounts for those who don't have high debt screaming for their attention, and already have a good investment package. "GICs are along the same lines as the nonregistered mutual funds in that whatever money you put into them, you get back in full," Christie says. "Nowadays you can put your money into them for 6, 9 or 12 months. The longer you keep it in, the higher the interest. Then when the time is up, you have the option of cashing in the interest or rolling it over again. This is a great option for those who don't need the cash right away and want to earn great interest."

As Christie says, being sure to cover both the debt and savings bases will keep you in the black for a longer time. And that's a much better, less stressful, place to be.


Published September 22, 2009

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