974. Laura reviews what to do when you have a small or large amount of extra money in your budget.
974. Laura reviews what to do when you have a small or large amount of extra money in your budget.
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Welcome back to episode 974 of Money Girl–I appreciate you downloading the show! I'm Laura Adams, an award-winning author, on-camera spokesperson, female money speaker, and founder of The Money Stack, my Substack newsletter. Free subscribers automatically receive my Money Success Toolkit, which includes the exact templates I use to manage my finances.
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Whether a tax refund hits your bank account, a year-end bonus gets added to your paycheck, or you receive an unexpected cash gift, it's an incredible opportunity to improve your finances. While you might be tempted to go on a shopping spree, this post will show you how to prioritize extra money so you can reach key financial goals, build wealth, and even spend some guilt-free!
READ ALSO: How to launch a windfall into wealth
6 steps for using extra money
For most people, building wealth is a slow, steady process that takes decades. But extra cash, whether it's a small amount leftover each month or a large lump sum, can allow you to leap forward with your finances.
However, spending extra money on a more expensive vacation, car, or clothes means the money is gone, and your financial health stays the same. In other words, having even a little more than you genuinely need is a big deal that you can parlay into a more secure financial future.
Consider the following six steps to grow and enjoy extra money.
1. Build your emergency savings.
Having emergency savings is critical for staying safe if you hit a financial rough patch, such as losing your job or incurring unexpected expenses. How much emergency money you need depends on your work and family situation.
For instance, if you work in an unstable industry or are the sole breadwinner for a large family, you need a bigger financial cushion than a single person with no dependents and plenty of job opportunities. An emergency fund is like having insurance for handling a potential financial hardship.
A good rule of thumb is to build a cash reserve of at least one to three months of living expenses. You might start with a small goal, such as saving 1% or 2% of your income annually. For instance, if you earn $50,000, make a goal to save $500 or $1,000 within a year, and increase it annually until you have a healthy savings balance.
If you don't have healthy emergency savings, that's the first place your extra money should go. Keep it in high-yield, FDIC-insured savings so it's never exposed to risk and will be there when needed.
READ ALSO: The right amount of emergency money to keep in cash
2. Max out a workplace retirement plan.
Investing through a workplace retirement plan, such as a 401(k) or 403(b), allows you to reduce your current or future tax liability and grow your balance. That's a powerful combination for building wealth.
In addition, you can use multiple retirement accounts in the same year. However, how much you can contribute and the tax benefits you receive depend on the accounts you're eligible for and choose to contribute to.
For instance, for 2025, if you have access to a workplace retirement plan, most allow contributions up to $23,500 or $31,000 if you're over 50. Those aged 60 to 63 can make higher "super catch-up" contributions.
If you're not participating in a retirement plan or are enrolled but not maxing it out, that's the next best way to use any extra money. You have until December 31 to make contributions for the current tax year.
RELATED: What to do if you contribute too much to an HSA, IRA, or 401(k)
3. Max out a self-employed retirement account.
Suppose you have business income from a part-time or full-time venture. In that case, you can use a tax-advantaged retirement account for the self-employed, even if you already max out a workplace retirement plan offered by an employer.
One of my favorite self-employed retirement accounts is a Simplified Employee Pension plan, known as a SEP-IRA. It allows you to make contributions up to 20% of your net self-employment income. For 2025, your total contribution can be up to $70,000 if you have as much income.
Another option when you're self-employed with no full-time employees other than a spouse is a solo 401(k). For 2025, you can contribute up to $70,000, based on your income, or up to $77,500 if you're over 50. However, those from age 60 to 63 can contribute more, up to $81,250.
Since self-employed retirement plans have higher annual contribution limits, they're a great place to invest extra money when you have business income.
READ ALSO: 15 money-savings tips for you to fight inflation
4. Fund a Roth IRA.
If you have a healthy emergency fund and max out a workplace retirement plan, self-employed retirement plan, or both, and still have extra money, consider funding a Roth IRA. For 2025, you can contribute up to $7,000 or $8,000 if you're over 50.
No matter how much you contribute to a workplace retirement plan, you can always max out a Roth IRA in the same year, if you qualify. A Roth IRA is the only retirement account that bases eligibility on your annual income.
For 2025, if you file taxes as a single, you're ineligible for a Roth IRA when your modified adjusted gross income (MAGI) is at or above $165,000. If you're married and file taxes jointly, neither of you can contribute to a Roth IRA when your household MAGI is $246,000 or higher.
If your income is below those annual limits, you can partially or fully fund a Roth IRA. Roth contributions are not tax-deductible; however, you can make withdrawals in retirement entirely tax-free.
Note that traditional retirement accounts allow you to make tax-deductible contributions, but future withdrawals are taxed as ordinary income.
LISTEN ALSO: 4 ways to fund a Roth no matter your income
5. Max out a health savings account (HSA).
If you're enrolled in an eligible, high-deductible health plan, funding a health savings account (HSA) is an excellent way to use extra money. These accounts offer the following terrific tax benefits:
For 2025, you or anyone else (such as a family member or your employer) can contribute up to $4,300 when you have a self-only health plan, or $8,550 for a family plan. Plus, if you're over age 55, you can contribute an additional $1,000 to an HSA when you have either type of health plan. HSA funds roll over from year to year with no spending deadline or penalty.
RELATED: 4 common HSA mistakes and how to correct them
6. Invest through a brokerage account.
Once you've exhausted tax-advantaged ways to invest extra money, it's time to look at taxable options, such as a brokerage account. When you have dividends or capital gains in a brokerage, you must report the income on your tax return. The brokerage will send you the appropriate tax forms for the prior year in January, so you know the types and amounts of income you earned or lost.
The tax rate you must pay depends on how long you own an investment and your taxable income. When you profit from an asset you owned for less than a year, it's a short-term capital gain. You pay the same tax rate as for your wages or other "ordinary" income, which currently ranges from 10% to 37%.
Your tax on assets owned for more than a year is long-term capital gains. The tax ranges from 0% to 20%, depending on your income, with the average investor paying 15%. While paying tax on investment growth in a brokerage isn't ideal, the upside is that you can take withdrawals any time without penalty.
Early withdrawals before age 59.5 from most tax-advantaged retirement accounts require you to pay a 10% penalty. The only exception is taking distributions of your original Roth contributions (but not the earnings portion), which get taxed upfront when the money goes into the account.
When you're fortunate enough to have extra money, I recommend taking a holistic view of your financial life and reviewing your goals. Before making significant money decisions, especially with a large lump sum, it's wise to wait at least 30 days. You could park the funds in a high-yield savings account until you have a clear plan, or you could speak with a financial advisor.
Consider what you genuinely want to accomplish with your money, such as increasing certain insurance coverages, putting your kids through college, starting a business, or getting rid of high-interest debt. Only you know the answers.
If your finances are already in pretty good shape, consider a reasonable spending splurge that you've been dreaming about. Good money management is always a balance between enjoying life now and ensuring that your future self will be happy, safe, and secure.
Remember, the next time you get a windfall—big or small—you have a choice. You can let it slip through your fingers and stay in the same financial spot, or you can use it to move forward and build more wealth and security.
If you found this episode helpful, the best way to say thanks is to write a quick review in your podcast app or share it. You can be the person who helps a friend make a life-changing decision with extra money.
That's all for now. I'll talk to you soon. Until then, here's to living a richer life!
Money Girl is a Quick and Dirty Tips podcast, and I want to thank our fantastic team! Steve Riekeberg audio-engineers the show. Holly Hutchings is our director of podcasts, Morgan Christianson is our advertising operations specialist, Rebekah Sebastian is our marketing and publicity manager, and Nathaniel Hoopes is our marketing contractor.