Receiving unexpected or extra income is always welcome, but people may be unsure of what to do with it. If you’re a gig worker, there may be more opportunities to earn additional money. For example, you could land a new contractContract A binding written or verbal agreement that can be enforced by law.+ read full definition, a lucrative freelance project could grow in scope, or you could receive a special bonus or even a large tip.
People may be unsure of what do with extra or unexpected income. Here are 4 financially responsible things to do with extra income.
1. Pay down debt
Use your cash windfall to pay down any debtDebt Money that you have borrowed. You must repay the loan, with interest, by a set date.+ read full definition you might have. Tackle your credit card debt first because it can save you on the amount you pay in highest interest rates.
2. Fill up your emergency fund
A general rule for emergency savings is to have enough to pay today’s bills plus living expenses for 3 to 6 months. Depending on your personal situation or future prospects for work, you may want to save even more. Keep your emergency savings in an accountAccount An agreement you make with a financial institution to handle your money. You can set up an account for depositing and withdrawing, earning interest, borrowing, investing, etc.+ read full definition that you can easily access on short notice like a savings accountSavings account A bank account intended for depositing funds. Pays interest and lets you withdraw cash at any time.+ read full definition or cashable GIC.
3. Set aside money for retirement
Put the extra income into your retirement savings plan. Along with building your retirement nest egg, you will also enjoy the benefits come income taxIncome tax A charge you pay based on your total income from all sources. The Canadian government and your province set the rate.+ read full definition time. Any registered retirement savings planRegistered Retirement Savings Plan A plan that lets you save for retirement while lowering your income taxes. You choose how you want to invest your savings. You don’t pay tax on any money in your account until you take it out.+ read full definition (RRSPRRSP See Registered Retirement Savings Plan.+ read full definition) contributions you make can be deducted to reduce your taxable incomeTaxable income The amount of income you have to pay tax on, after tax credits and deductions.+ read full definition on your taxTax A fee the government charges on income, property, and sales. The money goes to finance government programs and other costs.+ read full definition return.
4. Work towards long-term goals
Grow your extra cash by putting it into your investmentInvestment An item of value you buy to get income or to grow in value.+ read full definition portfolioPortfolio All the different investments that an individual or organization holds. May include stocks, bonds and mutual funds.+ read full definition. The potential to earn a return on your investments over time can help you achieve larger goals, such as paying down loans, buying a house, or funding education.
Wondering if it’s better to pay off debt or investInvest To use money for the purpose of making more money by making an investment. Often involves risk.+ read full definition your extra income? Use the Pay Down Debt or Invest Calculator to learn more.