An increase in my paycheck, what to do with this extra money? I have some choices 😉
I have received my first paycheck of 2020. And yes, I have received more than 3% extra than in 2019. This partly because of the new tax-system in The Netherlands and I also got a collective agreement raise (for my Dutch readers: Een CAO-verhoging).
The new tax-system, or better, the taxes reduction works out favorably for me! This came as no surprise for me, the taxes reduction was announced last year, and as a personal finance geek, I already calculate my benefits 😄.
The question now is, what to do with this raise? Of course, I can spend it all, but the smarter choice is to invest it in dividend paying stocks.
What can I do with this extra money?
This is money that I have not taken into account. I can still manage well with my income from 2019. So actually, this is extra money. Let’s see how I can make this extra money work best for me. For me personally there are three options, namely: Saving, Investing or paying off (a part of my) mortgage. Let us look at these options.
The interest rate on a normal saving account is currently (almost) nil in the Netherlands. On a normal savings account you only get 0.01% interest. This is really low!
Suppose I get an extra € 150 per month and that for 10 years every month. What yield does this savings account realize for me? After 10 years I have € 18,008.28 in my savings account, of which I have deposited € 18,000 myself. So, after 10 years I have received € 8.28 in interest. This is really nothing. It almost feels like an insult. I can therefore safely state that putting this extra money on a saving account, doesn’t bring me much closer to my goal of financial independence.
“How many millionaires do you know who have become wealthy by investing in savings accounts? I rest my case.” — Robert G. Allen
The next option to explore is investing. Would investing this extra money bring me closer to my goal of financial independence? Let’s see.
Suppose I receive the same additional € 150 per month and that for 10 years every month. What yield does investing realize for me? That of course depends entirely on the return I will realize with my investments. When I look at my Vrijheid Fonds, I see that I have had an annual average return of 7% for the past 20 years.
If I use this annual average return, what yield will the extra €150 per month realize for me after 10 years of investing and reinvesting the dividend (of course 😀)? After 10 years, I will have € 25.1010.25 in my broker account, of which € 18,00 I have deposited myself. So, after 10 years of investing this gives me €7,101.25 of extra money That is much better than saving! And yes this brings me a small step closer to my goal.
Now we know what the yield for this extra money is of a saving account and of investing. There is of course an another option and that is using this extra money to pay off part of my mortgage. This is also a popular option in our PF community. So, this is definitely worth investigating.
Fortunately, the interest that I have to pay on my mortgage is currently much lower than the annual average return that I can achieve on my investments. The extra repayment of € 18,000 over 10 years saves me just under € 2,400 of interest, while naturally I use the eighth world wonder: Compound Interest.
If I compare these three options, then for me personally investing is the best choice that helps me get closer to my goal of financial independence.
Did you receive some extra salary in January? And what do you do with this extra money? I like to hear from you!