What to do with spare money

So you have some extra income this month – congratulations! But knowing what to do with surplus cash is where things can get tricky.

23 Apr 2019

Some people seem to be born with a special gene that gives them financial superpowers. Whether it’s mastering the stock market or always knowing when and where to invest, these people can ignite both envy and awe.

Nobel Laureate and former child whiz kid, Robert Merton, is one of these people.

“My first entrepreneurial activity came when I was about eight years old,” says Merton. “I started a thing called the RCM Savings of Dollars and Cents Company, which was a depository bank. I went to family and friends, collected their money, was allowed to go with my parents to the local bank, opened an account which I earned interest on – more interest than I paid my people.”

Of course there are the obvious choices like putting spare money aside for a rainy day or into a retirement fund. A good benchmark, according to Merton, is to save around 20 percent of one's salary per month for retirement. If you find yourself with some extra income, use it to either to make up for months you haven’t contributed to your retirement goals, or just to get a leg up.

If you have saved more than 20 percent of your monthly salary and are looking for something different then congratulations! For those with confidence and security relating to their finances, extra income can present an opportunity to take more risks than you normally would.

It can be a good time to put it towards retirement, either to make up for months you haven’t contributed your goal or at all, or just to get a leg up.

With a growing focus on health, wellbeing, travel and cultural experiences, the question of what it means to invest has widened. Nobel Laureate Sir Christopher Pissarides has some softer suggestions. An advocate for lifelong learning, he sees some unexpected or extra money as the perfect opportunity to reinvest in yourself and stay competitive in an ever-changing economy. 

“Lifelong learning is absolutely essential today because the type of knowledge that we require is changing so fast,” he says.

According to Pissarides, investing in one’s self can take a more relaxing form, too.

“We know that as incomes rise, and people become wealthier, they're looking for new stimuli in in their free time,” says Pissarides. “Artistic creation becomes important. Good theater, good music.”

The two things that concern people the most are health and their appearance,” he continues. “So you can see if those are your first two concerns and you make some money in your life, that's what you are going to want to spend it on.”

Never one to pick favorites, we think a combination of reinvesting spare money and allotting some to a little rest and relaxation sounds like a pretty wise approach.

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