When human beings have an extra $1, they tend to consume it. It is no secret that consumption rises with income. After all, why not? If you are given a raise or earn some side income, the human tendency is to reward ourselves and use it towards something we desire, such as a new car, or a new pair of shoes or handbag. While these are rewarding, they only reward us in the short-term and at the end of the day, lose its value over time, and do nothing to grow your long-term wealth. While by all means, one should reward oneself after hard work, but these can be smaller pleasures - such as investing in a book you want to read, or watching a documentary, or even delayed, as that $1, if invested, will grow over time and yield even greater returns down the road.
If you have an extra $1, invest it.
What You Should Do with an Extra $1?
If you have an extra $1, you should invest it. However, this comes with a caveat. You should invest it once you have paid down any debt and have an emergency fund established first. Check out our free pre-investing workbook that will help you determine what you need to do before you invest.
Pay Down Debt
Most debt comes with interest. You are far better off paying down any debt before you invest, especially debt that is greater than the rate of return you would expect to earn on the $1 as an investment. For example, the average annual return of the S&P500 Index over a long period of time is around 10%. But interest rates on credit card debt is greater than that and could be up to 24%! You are far better served by paying down any debt first and then investing any amounts beyond that, once you have established an emergency fund.
Establish an Emergency Fund
People can lose jobs very quickly or be in a situation where they need additional funds in an emergency. You must establish an emergency fund before you invest even $1. You should have an emergency fund before you start to put funds towards for investing. It is important to have an emergency fund for unforeseen events. We recommend at least six (6) months-worth of expenses, and some people even recommend up to 12 months-worth of monthly expense for your emergency fund. It depends on your risk tolerance and how much you can/should put aside. We would recommend that you keep your emergency fund in cash, perhaps in a high-yield savings account.
Then invest that $1
Once you have paid down your debt and established an emergency fund, then you should invest that $1. Of course, if you want to use some of that for a short-term reward (we understand that you do need motivation sometime!), but you should invest that amount. You can invest that in yourself (i.e. courses, books, etc) and you can invest that into the stock market. But that $1 should not go into savings! See our post titled “Long-term value of $1 invested vs. long-term value of $1 saved”).
In short, there are many things that you can do with $1. You should invest that $1, but only after you have paid down any debt and established an emergency fund.
Key: If you have an extra $1, invest it.
Check out our website SHALnCO for more resources on investing, including courses and eBooks.