What should I do with the extra income I will be earning from a promotion?
I am 26 years old, married, and have three kids. I was recently promoted. I will now have an extra $300-$400 in income and I'm not sure what I should do with it. I have about three months of expenses saved as an emergency fund. Should I invest my extra income or put it in a savings account? I'm new to investing and not sure what I should do with a little extra income.
It sounds like you have the basics covered with your emergency fund. And the fact that you have extra money indicates your budget is well under control. I can see two scenarios with the extra funds.
First, you haven't indicated if you have any debt. But if you have credit cards, you should allocate the extra income to get those paid off. If you have student loan debt, you might want to do a 50-50 split between your student loans and investing.
The second scenario is investing. Since you don't know much about investing, it will be best if you work with a service that will manage your money for you. There are automated investment platforms, call robo-advisors, that can design and manage a small portfolio for you. Examples are Betterment and Wealthfront.
Since you want to retain the ability to access the funds, I'd set up the account as a Roth IRA. Under that program, you'll have the benefit of tax-deferred (and ultimately tax-free) investment income. But since your contributions are not tax-deductible, you can withdraw them at any time without having to pay tax or an early withdrawal penalty.
The combination of a Roth IRA held with a robo-advisor will give you investment management, with the ability to access your money if need be. It's an excellent combination for a person with your personal profile.
This is not a simple answer.....much more to consider here.
Do you have a will? how old are your kids?
Do you have a trust? total income you and your wife make? So many more questions here.
A roth IRA would be awsome for you to save in, and all tax free. You can also use life insurance, and pile up even more than the roth. its an amazing way to save and save tax free.
We can help, but we must know much much more
You have received a lot of good answers, so I will address just one thing you asked: "Should I invest .. or put it in a savings account?"
Your investment account IS your savings account. You shouldn't view them as separate entities. Say at some point in the near future you have $100,000 invested in a mix of good-quality equities. Say further that three months of expenses is about $15,000. You don't need to keep cash on the sidelines, uninvested, just because something unexpected might happen. Make sure your investment account has access to margin so you can take money out without having to sell anything. You clearly might not need all $15,000. After the emergency passes you will continue saving and replenish the amount withdrawn, right? So why keep anything an an account that pays essentially zero return?
I'd love to see you get your 401k started. Retirement will be here before you know it. Make sure to contribute at least enough to get the full employer match. Skipping the employer match over your working life could be a million dollar mistake.
Beyond that look to start a non-retirement investment account. Can work as a back up emergency fund. With three kids, there will always be something to spend money on.
Congratulations on the promotion! A little bit of extra income can go a long way if you’re using it well. First of all, if you’re in any debt that has a 5% or higher interest rate, it may be best if you put your extra money there. If you can address that first, it will save you a lot in interest over the life of the loan. If you’re out of debt, you should be contributing to your employer’s retirement plan up to their match. Take advantage of the additional money they’re willing to give you per month for planning ahead. If you’re already doing that or your employer doesn’t have a match program, you should consider building your emergency fund up a little more. The last thing you want is to get rolling on our investing and be immediately setback by some large, unexpected expense. Three months is an excellent start, but since you have three kids it is a good idea to have a little extra in savings. Next, you should start investing in your retirement. You have many years before you’ll retire and your money will earn dramatically more in the market than in a savings account. You could work toward maxing out a ROTH IRA, if applicable, or contributing more to your employer’s 401(k) plan. The best time to invest for retirement is in your 20’s because your money has so much time to grow, so you’re in the perfect position to start building up your long term wealth. Good luck!