One of the biggest mistakes I made in my 20s is a mistake that Im still making now in my 30s: Too much of my cash is just sitting in a savings account, and I have no plan or strategy for what to do with that money.
As it turns out, Im not alone — many young investors are making the same mistake. According to a study by Empower, the average person in their 20s is holding 28% of their wealth in cash.
While many experts have varying opinions on what percentage of a persons portfolio should be cash (the common opinion is 10% to 20%), financial advisors say there are four reasons keeping too much of your wealth in cash is a waste of money.
Have you suddenly found yourself with some extra cash on hand? Maybe it’s that tax refund you’ve been waiting for a year-end bonus or perhaps your side hustle is finally paying off. Whatever the source, that extra money sitting in your account deserves better than being randomly spent on Amazon late-night shopping sprees (we’ve all been there!).
In 2022, with inflation running wild and economic uncertainty looming, making smart choices with your extra cash is more important than ever I’ve put together this comprehensive guide to help you figure out what to do with that extra money to make it work harder for you
Why You Shouldn’t Just Spend Your Extra Money
Before we dive into the strategies, let me share something I learned the hard way: that immediate splurge feels amazing for about 48 hours. Then the dopamine wears off, and you’re left wondering where your money went. Trust me, I’ve been there!
While treating yourself isn’t wrong (and I’ll even suggest ways to do it smartly), putting most of your extra cash toward long-term financial stability will bring you much more happiness in the long run.
6 Smart Strategies for Your Extra Money in 2022
1. Time Your Money Moves Wisely
The when can be just as important as the how when it comes to extra money. If you’ve received an inheritance during an emotionally difficult time, it might be best to park those funds temporarily.
I recently helped my cousin who received an unexpected work bonus. Instead of deciding immediately what to do with it, we put it in a high-yield money market account for three months while she:
- Processed her options
- Researched the best uses
- Got past the initial “I want to spend it all” excitement
Some temporary holding options include:
- Money market accounts
- Certificates of deposit (CDs)
- High-yield savings accounts
This strategy gives you breathing room to make thoughtful decisions rather than emotional ones.
2. Crush That High-Interest Debt
Let’s be honest – this isn’t the sexiest option, but it might be the smartest in 2022’s rising interest rate environment.
If you’re carrying high-interest debt, particularly credit cards (with their absurd APRs often exceeding 20%), using your extra cash to pay down these balances can be the equivalent of earning a guaranteed 20%+ return. No investment can promise that kind of return!
Quick calculation: If you have $3,000 in credit card debt at 22% APR and make only minimum payments, you’ll pay around $3,000 in interest alone over the life of the debt. Wiping that out with your extra cash saves you thousands!
After clearing those balances, commit to paying off any new credit card charges in full each month. Your future self will thank you profusely.
3. Build Your Emergency Fund (Yes, You Really Need One)
If 2020-2022 taught us anything, it’s that life is unpredictable. Having a solid emergency fund is no longer optional – it’s essential.
Financial experts typically recommend having 3-6 months of living expenses tucked away. In 2022’s uncertain economy, I’d lean toward the 6-month end of that spectrum if possible.
I keep my emergency fund in a high-yield savings account where it earns some interest while remaining easily accessible. The peace of mind is worth more than any vacation I could spend that money on!
When my car suddenly needed a $2,200 repair last winter, I was able to pay cash without stressing or creating new debt. That’s what an emergency fund does – it turns potential financial disasters into minor inconveniences.
4. Boost Your Investment Game
If you’ve already tackled high-interest debt and have a solid emergency fund, investing that extra money could help you build wealth for the future.
In 2022, with inflation eating away at cash savings, having growth-oriented investments is more important than ever. Here are some options to consider:
Retirement accounts:
- Increase your 401(k) or 403(b) contributions
- Max out your IRA contributions
- Aim for 10-15% of your pre-tax income going toward retirement annually
If you’ve maxed out retirement options:
- Health Savings Account (HSA) if eligible
- Brokerage account for more flexibility
- Real estate investments
We opened a brokerage account last year with some extra money, investing in a mix of index funds and a few individual stocks we believe in. While the market has been volatile in 2022, we’re investing for the long-term and see the current dip as a buying opportunity.
5. Invest in Yourself (The Ultimate ROI)
Sometimes the best investment isn’t in the stock market – it’s in yourself! Using extra cash to enhance your skills, knowledge, or earning potential can pay dividends for decades.
Some of the best self-investments in 2022:
- Professional certifications or training to advance your career
- Courses to develop new skills (coding, digital marketing, etc.)
- Seed money for that side hustle or small business you’ve been dreaming about
- Education for your children or family members
I took an advanced certification in my field last year that cost $2,000. Within six months, it helped me negotiate a $7,500 salary increase. That’s a 275% first-year ROI!
And don’t overlook investing in your health. A gym membership, home exercise equipment, or preventative healthcare might seem like expenses, but they’re investments that can save you thousands in medical costs later.
6. Treat Yourself (Mindfully)
After all this responsible advice, I’m giving you permission to enjoy some of that extra money! Life isn’t all about delayed gratification and future planning.
The key is balance. Many financial experts suggest using the 80/20 rule with windfall money:
- Put 80% toward financial goals (debt, savings, investments)
- Enjoy 20% guilt-free on something that brings you joy
My husband and I recently came into some unexpected money and decided to allocate:
- 50% to paying off our last credit card
- 30% to our emergency fund
- 20% to a weekend getaway we’d been wanting to take
That vacation was actually more enjoyable knowing we’d made responsible choices with the majority of the funds.
Making Your Plan: Putting It All Together
Everyone’s financial situation is unique, but here’s a general framework for what to do with extra money in 2022, in priority order:
- First, pay off high-interest debt (anything over 6-7% interest)
- Build your emergency fund to 3-6 months of expenses
- Max out tax-advantaged retirement accounts
- Consider additional investments based on your goals and timeline
- Invest in yourself through education or business opportunities
- Enjoy a portion of the money on something meaningful
Common Mistakes to Avoid With Extra Money in 2022
Based on my experience working with friends and family on their finances, here are some pitfalls to avoid:
- Lifestyle inflation: Using extra money to upgrade your lifestyle in ways that increase your monthly expenses
- Analysis paralysis: Overthinking to the point of doing nothing with the money
- Emotional decisions: Making money moves when you’re stressed, excited, or otherwise emotional
- Trying to time the market: Getting too clever with investment timing instead of focusing on long-term growth
- Lending to family/friends: Unfortunately, this often leads to strained relationships
Final Thoughts: Take Action!
The worst thing you can do with extra money is nothing. Letting it sit in a low-interest checking account while inflation eats away its value is a missed opportunity.
In 2022’s economic environment, being intentional with your extra cash isn’t just smart—it’s necessary. Whether you’re building security through debt payoff and emergency savings, growing wealth through investments, or investing in your own skills and happiness, having a plan makes all the difference.
I’d love to hear what you’re doing with your extra money this year! Drop a comment below sharing your strategy or asking any questions you might have.
Remember, the best financial decisions align with your personal goals and values. There’s no one-size-fits-all approach, but these principles will help you make choices you’ll be thanking yourself for in the years to come.
What’s your plan for your extra cash in 2022?
It’s a sign you don’t have financial goals
Even though it makes me feel financially successful when I refresh my savings account and see a satisfying amount, its also telling that I dont have clarity around my future money goals.
Evon Mendrin, a financial planner, says that having too much cash can indicate a lack of financial goals or priorities.
“You dont know what to do with the cash, so it sits idle,” said Mendrin. “If you get clear on what your financial priorities are, you can get a better sense of what to do next with extra cash.”
So what should a person do instead? Mendrin recommends bucketing your money as a good next step.
“With your shortest-term bucket, include expenses you might need to pay for in the very near term, like an emergency fund,” said Mendrin. “Once that bucket is filled, then think about your mid-term and longer-term financial goals. Invest the funds in alignment with those goals.”
He said that for long-term goals like retirement, you can invest funds more aggressively, like stocks and real estate, that are expected to reliably outpace inflation over time. For mid-term goals, the funds can still be invested in things like bonds.
You’re missing out on opportunities
While having a lot of cash in your savings account can make you feel safe, Nate Hansen, a CPA, says youre missing out on opportunities by letting it sit there.
“Holding cash endlessly year after year instead of investing it is like never getting up the courage to ask your crush on a date in high school,” said Hansen. “While the stock market has returned right around 10% over the long-run, theres also the compound interest aspect of invested funds over a long period of time.”
Hansen says that if you still want to keep a portion of your portfolio in very low-risk securities, then consider treasury inflation-protected securities, or TIPS.
“These are US treasury bonds that are adjusted for inflation based on the consumer price index,” said Hansen. “TIPS protect against inflation by the actual face value of the bond being adjusted for inflation, instead of adjusting the interest rate.”
Start investing in bonds today: Bond ETFs have low volatility, ideal for passive investors with short-term financial goals. Wealthfronts ETF is focused on maximizing your after-tax yield with a diverse, low-cost blend of bond ETFs. Learn more about buying treasury bonds.
What Do We Do With Extra Money Every Month?
FAQ
What’s the best thing to do with extra money?
Use extra cash to tackle financial goals, like paying off high-interest debt, building an emergency fund, or boosting your investments. Consider investing in personal or professional growth, whether it’s taking a course, starting a business, or saving for future expenses.
What is the $27.40 rule?
What is the 7 3 2 rule?
The “7-3-2 rule” most commonly refers to a financial strategy for wealth building, not a single concept. It suggests a goal of saving your first crore (10 million rupees) in 7 years, then your second crore in 3 years, and your third crore in 2 years, leveraging compounding and disciplined investing. It can also refer to a trucking industry regulation for splitting mandatory driver breaks or a rule of thumb for estimating investment needs.
What is the 70% money rule?
Instead of tracking dozens of particular categories, this budgeting formula provides you with just three: 70% of your income goes to spending. 20% of your income goes to saving. 10% of your income goes to debts or donations.