The Little Things That Mean a Lot

Question of the week:I recently received a small raise in pay and am wondering about the best thing to do with it. It isn't very much--about $1,000 per year--but I want to make the most of it. What do you suggest doing with this extra money? --MBL

Dear MBL,

Dear MBL,

The fact that you are so deliberate with how to use this money sets you apart from most people, who simply absorb extra cash into their daily finances and never make a clear plan for getting something substantial from it.

When we asked recently members of the Armchair Millionaire community about how they use extra money that comes their way, their responses showed your same level of thoughtfulness. Here are two examples:

"Any extra money I get is divided in thirds: 1/3 to debts (if any for that month), 1/3 to savings (Roth IRA and emergency fund), and a 1/3 to myself. (Hey, I earned it!)" --Paula

"I take every dollar and split it into buckets: 75 cents to retirement savings and 25 cents to regular savings, which I eventually use to reward myself with a purchase or vacation." --Ian S.

The most important thing is not how much money you have, but whether or not you deliberately choose to save a portion and then follow through on your plan. My checklist has a range of ideas for turning your small trickle of money into a torrent.

The Armchair Millionaire Checklist to Making a Lot Out of a Little

• Ensure a wealthy retirement. If you stash away that thousand dollars each year in your 401(k), it will grow to just under $181,000 over the next 30 years at an average annual growth of 10 percent. Not only will you put yourself on a fast and painless savings track, you'll a get a nice tax break, to boot. If your employer offers a match on your contributions (as many do), then you'll leverage that money even more. If you don't have a 401(k), set up an IRA.

• Build your emergency fund. Nothing comes in so handy as cold hard cash when you face a real emergency, like the loss of your job or a major house repair. I recommend keeping about three months' worth of expenses in a liquid account.

• Save for college. An annual contribution of $1,000 to a college fund earning an average return of 10 percent will grow to nearly $35,000 in 15 years. There's a nice range of college savings programs now available, most of them offering substantial tax advantages.

• Join an investment club. Investment clubs are a great way to learn common sense investing techniques while establishing a solid core holding of stocks. Most require minimum monthly contributions of just $20 to $50.

• Pay off your mortgage early. Want to get out from under the mortgage burden? An extra $1,000 payment each year on a $150,000 30-year mortgage with seven percent interest will knock off six years.

  By enrolling in a dividend reinvestment plan (available from most major companies), you can bypass the broker and purchase stock directly from the company. These plans require only small monthly investments (which can be set up as automatic withdrawals from your checking account) and will automatically reinvest any dividends for you.

• Build a stock portfolio.

THE BOTTOM LINE: Don't assume that a small amount of money won't do a lot. With patience and a clear plan, small amounts can achieve big goals.

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