4 Ways Empty Nesters Can Use Their Newfound Cash

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Once the kids leave home, most parents find that their monthly expenses drop significantly. That means you'll have more cash to spend than you're used to. Do nothing, and that extra cash will disappear into frivolous purchases. But if you immediately give that extra money a purpose, you could dramatically improve your financial future.

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1. Pay down debt

Since raising kids is expensive, odds are you have some debt hanging over your head. Credit card debt is particularly insidious, as the high interest rates mean that balances often grow, rather than shrink, over time. Once you have some extra money coming in each month, getting control of your debt should probably be your top priority.

First, make a list of all your debts, putting debts those with the highest interest rates (most likely credit cards) at the top. Next, the minute your paycheck hits your bank account, take any money you don't need to cover living expenses and use it to make extra payments on those high-interest debts. While paying off your highest-interest debt first will save you the most money in the end, many people find it's more motivating to start with the smallest debt and put as much money toward it as possible while paying minimums on the others. This will get the first debt paid off quickly, allowing you to move on to the next-smallest debt until they're all gone.

2. Build an emergency fund

Most Americans have little to nothing saved for emergencies. You can be one of the exceptional savers and tuck away enough money to cover at least six months' worth of basic expenses. If disaster strikes -- say, you lose your job or have to replace the engine in your car -- you'll have enough money to stay afloat while you scramble to recover. Thus an emergency fund can save you from taking on huge sums of costly debt.

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An automatic transfer is typically the best way to guarantee that your extra money will keep making its way into your emergency savings account. You'll want to keep this money in a savings account so that it's readily accessible; note that internet banks typically pay far higher interest rate on their savings accounts than your local branch will. You might as well be making a little extra money from your money while it's sitting there, waiting to protect you.

3. Save for retirement

Many parents choose to save for their kids' college education instead of for their own retirements. Well, now that the kids are out of the house, you can finally take the opportunity to catch up on your retirement savings. Workers are best off saving 15% of their income to ensure a well-funded retirement; however, if you're really behind on your retirement savings, you'll probably need to contribute more than this.

A 401(k) is a great, convenient way to save for retirement, as you can arrange to have the money taken out of your pre-tax wages before your paycheck even hits your bank account. If your employer offers matching contributions, contribute at least enough to get the full match; to do otherwise would be to decline free money. If you don't have access to a 401(k), an IRA makes a fine substitute. Most IRA trustees are happy to set up an automatic contribution for you using your preferred schedule. You won't be able to contribute as much to an IRA as you could to a 401(k), but it's far, far better than nothing.

4. Other options

If the kids have only just started college, you'll have several more years of higher education to finance. Setting some money aside in a dedicated savings account for the tuition to come can be a wise precaution. You can even use an educational savings account such as a 529 plan.

You can also use dedicated savings accounts to prepare for major purchases in the future. For example, if you plan to buy a new house in a few years, now is a great time to start saving up the down payment. Preparing for major expenses in advance can help keep you out of debt in the future, and that means a whole lot more money to spend on the things that matter most to you.

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