What To Do With Extra Money (6 Steps That Really Build Wealth)

Extra money is any cash beyond your regular monthly expenses and existing savings goals. Most people waste windfalls on lifestyle upgrades that disappear, but there's a better way to use extra money that builds lasting wealth through eliminating debt, emergency savings, investments, and purposeful spending.

Your Extra Money Action Plan: 6 Tips That Build Real Wealth

These six steps work in order of priority and create a foundation that protects your money while building serious wealth over time.

1. Pay off high-interest debt above 7%

Eliminate all debts with interest rates above 7% before investing extra money elsewhere. Credit card debt at 20% interest costs you more than any investment will reliably earn, making debt payoff your guaranteed best return.

Use extra money to pay off credit cards completely, then redirect those monthly payments toward wealth building. The exception here is keeping $1,000 for small emergencies so unexpected expenses don't force you back into debt.

If you’re still sorting out your credit card debt, you can use my Debt Payoff Calculator to figure out exactly how long it’ll take you to pay off your current debts.

2. Build an emergency fund to cover 3-6 months expenses

Start with $1,000 for minor emergencies like car repairs for your emergency fund. This initial buffer prevents minor setbacks from derailing your debt payoff progress or forcing you into expensive borrowing.

Build toward 3-6 months of essential expenses in a high-yield savings account separate from your checking account. This fund protects your other investments and lets you take smart risks without financial disaster.

High-yield savings accounts earn 4-5% interest

Emergency funds belong in high-yield savings accounts that you can access quickly without penalties. Keep emergency money at a different bank from your checking account so you won't accidentally spend it. 

Online banks like Ally, Marcus, and Capital One consistently offer rates 10-20 times higher than traditional banks, meaning your emergency fund actually grows while sitting there. This separation also creates a psychological barrier that prevents you from dipping into emergency money for non-emergencies.

3. Get your full 401k company match

Contribute enough to your 401k to capture 100% of your employer match because this is guaranteed free money. If your company matches 50% up to 6% of salary, contribute at least 6% to get that full match. Many people leave thousands on the table annually by not taking advantage of this benefit.

Use extra money to increase 401k contributions if you're not already getting the maximum match. This step alone can add hundreds of thousands to your retirement wealth over time.

4. Max out retirement accounts

After getting a company match, use the extra money to max out your Roth IRA at $7,000 annually if you’re above 50 (note that this amount changes yearly so refer to IRA’s official documentation for up-to-date numbers) for tax-free growth. Then, return to your 401k and increase contributions toward the annual limit of $22,500. These accounts provide massive tax advantages and force long-term investing that builds serious wealth.

Someone investing $500 monthly starting at age 25 will have over $1.3 million by retirement. The key is starting early and being consistent, which becomes much easier when you use extra money to jump-start these contributions rather than trying to find room in your regular budget.

5. Invest in taxable accounts

Open investment accounts with low-cost index funds for goals beyond retirement, like house down payments or financial independence. Use extra money to jump-start these accounts because significant initial investments accelerate wealth building significantly. Target date funds automatically adjust as you age, making investing simple even for beginners.

These accounts provide options and opportunities that people living paycheck to paycheck never have. When you have substantial taxable investments, you can take advantage of market downturns, invest in real estate opportunities, or even start your own business without touching retirement money.

For more information and some personal recommendations on where to invest and when, check out my article, Asset Allocation by Age (+ Specific Recommendations).

Low-cost index funds provide instant diversification

Low-cost index funds provide instant diversification across hundreds or thousands of companies. Avoid individual stocks, cryptocurrency, or complex investments until you've built substantial wealth in simple index funds. Funds with expense ratios below 0.20% keep more money working for you instead of going to management fees. A single S&P 500 index fund gives you ownership in 500 of America's largest companies, spreading your risk automatically.

6. Spend strategically on experiences and skills

After handling steps 1-5, use extra money for purchases that align with your values and goals. Invest in skills that increase earning power, services that buy back time, or experiences that create lasting memories. Avoid random purchases or status symbols that don't improve your quality of life.

Calculate your hourly earning potential for outsourcing decisions

Calculate your hourly earning potential and outsource anything below that rate to focus on wealth-building activities. Quality purchases that last years beat frequent small purchases that add up to more money over time. This approach lets you enjoy your money guilt-free because you know your financial foundation is solid, and these purchases support your bigger goals.

When Spending Extra Money Actually Makes You Richer

After handling debt and building your financial foundation, some extra money purchases can increase your wealth instead of draining it.

Invest in skills that boost your income

Courses, certifications, or coaching that directly increase earning power often provide better returns than traditional investments. For example, a $2,000 course that helps you earn $10,000 more annually gives a 500% return in just one year.

• A digital marketing certification can lead to freelance clients paying $1,500+ retainers per month.
• A project management course like PMP or Scrum Master can unlock mid-level roles with $20k+ higher salaries.
• Learning copywriting can turn into a profitable side hustle, writing landing pages, emails, and ads.
• Even mastering Excel or data analysis can land higher-paying roles in operations or finance.

Focus on valuable marketplace skills like sales, marketing, programming, or management rather than general personal development.

Your ability to earn money is your greatest asset, so strategic skill investment beats most other uses of extra funds. Unlike stocks or real estate, skills can't be taken away from you and often compound over time as you become more experienced and valuable in the marketplace.

Buy back your time with services

Hire house cleaners, provide meal delivery, or provide other services that free time for higher-value activities like skill development. For instance, $100 every two weeks on a cleaning service can give you 4–5 extra hours. That's time you could use to take an online course, build a freelance portfolio, or grow a side hustle.

Calculate your hourly earning potential and outsource anything below that rate to focus on wealth-building activities. If you could make $50/hour freelancing or consulting, spending your evenings grocery shopping or mowing the lawn makes little sense. Time saved on low-value tasks can be redirected toward side hustles, learning, or strategic career moves.

Even batch-ordering ready-to-eat meals for $10/day can save hours weekly and help you reallocate energy toward more strategic moves. The goal isn't to become lazy, but to free up mental energy and time for activities that build wealth.

Stick to purchases that align with your values

After handling debt, savings, and investments, spend extra money on things that genuinely improve daily happiness. These purchases should match your Rich Life vision, not random impulses or keeping up with others. Quality purchases that last for years beat frequent small purchases that add up to more money over time.

The goal is conscious spending on things you love after securing your financial foundation. This might mean spending $200 on a premium kitchen knife that lasts decades instead of buying multiple cheap ones, or investing in a high-quality mattress that improves your sleep for years.

Different Types of Extra Money Need Different Strategies

Not all extra money is the same, and your approach should change based on where the money comes from and how much you receive.

Tax refunds and work bonuses

Treat tax refunds as forced savings you can deploy strategically rather than newfound money to spend immediately. Use work bonuses to make big financial progress, like eliminating remaining debt or fully funding emergency accounts. Consider adjusting tax withholding so you get smaller refunds and can invest throughout the year instead. Getting a huge refund means you gave the government an interest-free loan all year when that money could have been growing in your investment accounts.

Automate bonus money into investments before it reaches checking accounts, where you'll be tempted to spend it. Set up automatic transfers so your bonus goes directly to debt payoff or investment accounts the day it hits your account.

Side hustle and freelance income

Set up separate accounts for side income so it doesn't mix with regular spending money. Use side hustle money to accelerate financial goals like maxing retirement accounts or building investment portfolios. This income can cut years off your path to financial independence because it's truly extra beyond living expenses.

Scale successful side hustles into larger income sources while maintaining your wealth-building focus. Many people use side hustle income to fund their entire Roth IRA contribution or build substantial taxable investment accounts within a few years.

Large windfalls and inheritance money

Large amounts need time, and you need to avoid making any emotional, immediate decisions. Temporarily put substantial windfalls in high-yield savings while creating comprehensive investment plans. Avoid major financial decisions during emotional periods like grief, job changes, or relationship transitions.

Consider working with a fee-only financial advisor for windfalls over $100,000 because the stakes are higher and the tax implications are more complex. Take at least 30-60 days to research and plan before making major moves with life-changing money.

Why Most People Waste Extra Money

Even smart people make predictable mistakes with extra money because of psychological traps that feel logical but cost thousands over time.

Your brain treats windfalls like play money

Mental accounting makes you treat extra money differently than regular paychecks, even though dollars are dollars. You rationalize splurging because you already handle regular bills and savings, so extra cash feels free to spend. Without a solid investment plan, you'll always find reasons why you deserve to spend money now instead of investing it.

This psychological trap explains why lottery winners often end up broke and why people blow tax refunds on vacations instead of using them strategically. Your brain creates separate mental buckets for different money sources, making windfall money feel less "real" than earned income.

The expensive mistake of lifestyle inflation

Most people use extra money to upgrade their lifestyle with bigger apartments, fancier cars, or expensive habits.

• These upgrades become permanent expenses that eat future extra money too, creating a cycle of increased spending.
• You feel temporarily rich but remain permanently broke because the money disappears without building assets.
• Rich people keep lifestyle costs stable and invest extra money instead of spending it on status symbols.

This pattern explains why high earners often live paycheck to paycheck despite making six figures. Each raise gets absorbed into a more expensive lifestyle, leaving them no better off financially than when they earned half as much.

Missing compound growth opportunities that change everything

A $2,000 vacation bought with tax refund money could grow to $16,000 over 20 years if invested instead. Every dollar spent on consumption is a dollar that can't compound and grow into wealth over time. Starting early with large investments beats waiting and trying to catch up later because time is your biggest wealth-building asset.

Missing these opportunities in your 20s and 30s costs you exponentially more wealth in retirement. The $5,000 you spend on lifestyle upgrades today might have become $50,000 or more by the time you retire, representing years of financial freedom you gave up for temporary pleasures.

Your Rich Life Extra Money System

The best approach connects every extra dollar to specific goals that matter to you personally, rather than following generic advice that ignores your values.

Connect every dollar to your specific Rich Life goals

Emergency funds buy freedom from financial stress and terrible job situations. Investment accounts buy options and opportunities most people miss like business investments or real estate. Rich Life spending buys experiences and items that genuinely improve happiness and life satisfaction.

Avoid saving just to save without connecting money to specific goals that excite and motivate you. When you know exactly why you're investing $500 monthly, whether it's for early retirement, a dream home, or financial independence, you're more likely to stick with the plan and make smart decisions with extra money.

Scale wealth building as your income grows

Use extra money and raises to increase savings rates rather than lifestyle inflation. When you get a raise, immediately increase your investment contributions by the same amount so your lifestyle stays stable while your wealth-building accelerates.

• Rich people save more as they earn more, keeping expenses stable while investing the difference.
• Automate increases in savings and investment contributions so extra income builds wealth automatically.
• Focus on big wins of increasing income and smart investing rather than micromanaging small daily expenses.

The difference between people who build wealth and those who stay broke often comes down to what they do with extra money. When you follow this system, every unexpected bonus, tax refund, or side hustle payment becomes a building block for your Rich Life instead of money that disappears into lifestyle upgrades you'll forget about next year.