Five Money Moves to Make When a Recurring Payment Ends

My youngest son is graduating from college this spring — I can’t tell you how excited I am. Not only as a proud mother who gets to see her son accomplish a goal that is important to him and that he has worked very hard for, but because soon I will be free! I’ll be free from paying tuition and room and board! His tuition at the University of California has nearly doubled in four years so my husband and I have been paying out of pocket for his expenses each month. We are feeling the same way many people feel when they are close to paying off a car, their house or any other recurring bill — very excited AND since he is the last one, this is a bill that won’t be coming back.

So the question is what to do with the extra money? What would you do in this situation? You certainly don’t want to just use up the extra money on your lifestyle then years later, find yourself scratching your head wondering where it all went. Here are some ideas on how to put extra funds to good use:

Boost your emergency savings. This is probably the very first place to start because it is a cornerstone of family finances. Financial planners recommend having three months at minimum and up to twelve months of expenses in a liquid emergency fund. The amount depends on your position; a head of household or a single paycheck household may want to have a minimum of six months. An employee with a long tenure with a company and a secure job may only need three months expenses liquid and available.

Become debt free. Consider setting up an automatic payment to pay off a high interest credit card or loan with the extra funds. Make a list of all your debts (using this debt inventory chart) and take the extra funds and pay them toward the debt with the highest interest rate and when that one is paid off, take the whole payment and add it to the next one and so on and so on until you are debt free. Use the Debt Blaster calculator to determine when you’ll be debt free using this method.

Own your home free and clear. Adding extra principal payments to your house payment can take years off your mortgage and make your dream of owning your home free and clear into a reality. Take those extra funds. Use an amortization calculator to determine the effect of those extra payments. Click here. This is probably what my husband and I are going to do because we’d like to have our condo paid off in ten years. Since a mortgage payment if often up to 30% of a household budget, owning a house free and clear would make retirement income dollars stretch much further.

Increase your retirement savings. If you aren’t saving the maximum allowed in your 401(k), bump up your savings each month in your company plan. In 2012, the IRS allows you to save a maximum of $17,000 in your 401(k) and if you are over 50, you are allowed an additional $5,500 contribution for a maximum of $22,500. Saving extra funds may allow you to retire earlier or “in style” when you do. Imagine how happy you’ll be years later when you have a larger retirement nest egg because you made the decision to increase your savings today.

Start or increase an investment. Set up an automatic payment to your favorite mutual fund. Systematic investments are a great way to invest in mutual funds since your investment is deducted directly from your checking account every month. This is a great “out of sight- out of mind” investment that can be used for any type of goal.

The monthly payment we made to our son was a promise we made to help him get an excellent education and a good start in life. Now my husband and I need to “re-up” and make another promise to ourselves – choose another goal. We may put all of it toward the house payment or split it between that a systematic monthly investment. Whatever we end up doing, we want to make the most of our upcoming monthly windfall!

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