A recent college grad in his twenties asked me a question that is relevant to many people who have recently started working. What do you do with your spare cash? When you get your paycheck, there are some expenses that are unavoidable: rent/mortgage, utility bills, health care and car insurance premiums etc. Once you pay these off, and still have some cash left over, consider the following options.
Student loan repayment is always a good idea. Reserve all performance bonuses and salary increments to pay down student loan principal. Pay down the higher interest loans first. Make sure to deduct student loan interest from your taxable income every year that you make repayments. You will receive a Form 1098-E from your lender to help you fill out the details on your tax forms.
Beyond that, I strongly recommend putting away a piece of your disposable income into an Emergency Fund each month. This fund should grow to be at least 4-6 months of your monthly living expenses. This will empower you to go ahead and confidently invest in the markets.
If going to grad school in a few years is your goal, do some medium term financial planning. Decide on an appropriate dollar amount and start saving/investing to meet this target. To start off on investing, I recommend a balance of stock and bonds. When you are in your 20s, your younger age enables you to have a higher amount in stocks than bonds. (80% stocks, 20% bonds is a good general rule of thumb for people in their 20s).
There are two ways in which you can invest.
1) Through your employer’s 401-K.
2) Through your own investment account: brokerage, IRA, Roth IRA etc.
401-Ks and IRAs are for long term financial planning because you cannot withdraw from it without penalty before age 59 and ½. Therefore I recommend that you make it only one part of your financial planning, not the whole of it, especially when you do not have the advantage of an employer match.
If you have never invested in stocks before, a well-known broad-based US market index ETF such as the iShares Russell 3000 Growth Index Fund (IWZ) or iShares S&P 1500 index fund (ISI) can be a good start. If most of your investments are already in US stocks, consider buying an emerging markets ETF such as MSCI Emerging Markets Index Fund (EEM). For a broad-based bond mutual fund try the Vanguard Total Bond Market Index (VBMFX).
Again, the specifics depend upon your overall financial situation. The above ideas are general suggestions for what to do with some extra cash.
