What Should I Do With My Extra Cash?



 

There comes a time in our lives when we have a bit more income than we know what to do with. There's a feeling you often get when your receive a nice pay raise and/or your business is starting to take off. That feeling of uncertainty because you are accustomed to living on less money than you make and you want to make sure you are maximizing what you do with your money. What do you do then? "Save your money for a rainy day" is probably the next thing you'll hear from friends, family, or anyone else close to you. I think that is the most prudent advice but the real question is, "When can we be a little more free-spirited with our money?"

I think because we are creatures that act on impulse and live in an era where goods and services are literally at our fingertips, we tend to be pushed into a consumer-centric mindset and focus more on immediate satisfaction rather than deferred gratification. So the question stands, " What should I do with my extra cash?"

 

"The real question is, "When can we be a little more free-spirited with our money?."

 

Create a Spending Plan


The word “budget” can be quite restrictive at times and honestly overused. I tell my clients, “I want you to spend your money. I just want you to do it with intention AND on things that matter most to you.” While a budget tells you how much you have to spend, a spending plan creates intention. Many of us have been met with the crossroad question of, “I’m already maxing out my 401k, what do I do next?” The answer is never easy because it’s philosophical but there is an order of priority that I like to follow.


Make Sure You Have an Emergency Fund


The first thing I like having is an emergency fund. Lord knows I have seen enough changes in my life to know that I will always need one. I have gone through moves, job changes, and enough unexpected events that an emergency fund has become the #1 financial "to do" when I have excess cash and have a need to replenish it. It is quite simple and common knowledge at this point that 3-6 months of your expenses should suffice. And as much as it may pain you to have cash just "sitting" there, it is supposed to. That is the intention.


Save Money In Your 401(k) or IRA


The next thing I like checking off my list when I have extra cash is making sure that I am maximizing my retirement savings. Typically, an employer will match your contributions when you are contributing about 6% of your salary in your 401(k) plan so make sure you're taking advantage of their matching contribution. Why? It's free money. If you don't have a 401(k) available, use the 6% of your salary as a guide and defer that into an Individual Retirement Account (IRA). As you may know, there are limitations on how much you can contribute to an IRA ($6,000 if you are under 50 and $7,000 if you are over 50 in 2022) so if you are able to put more than the maximum allowed, you may have to look at other options.


Here's where it gets a little sticky. A 401(k) allows you to contribute up to $20,500 in 2022. Say you haven't contributed the maximum amount but can or let's say you have maxed out your 401(k)'s allowable contributions. What do you do next? You are going to have to take a guess at what the next couple of years are going to look like and be comfortable with that.


Short-Term Versus Long-Term Savings


If you see yourself having many short-term financial obligations coming to you in the near future like travel, buying a car, buying a home, etc.., then you may be better off saving that extra cash into a savings account for those near-term items. If you don't have anything coming up in the next couple of years, you could do one of two things. You can invest that extra money into an investment account outside of work to have the flexibility to withdraw it before retirement (there will be taxes for this of course) or you can increase your retirement savings into your 401(k) if you haven't maxed out your contributions.


Pay Down Debt, Save, or Spend?


What if I have debt? Shouldn't I be paying that down? The short and most prudent answer is yes. Saving on the interest you avoid by paying down debt would essentially be like a return on your investment; after all, "a penny saved is a penny earned." There are times when saving and/or splurging may be in your best interest rather than aggressively paying down debt. Some of the more tangible things to consider are the interest you would save by paying debt down, the amount of time it will take you to completely pay off your debt, and the opportunity cost involved in reallocating additional funds to your debt. From an intangible standpoint, how will the household be affected by not splurging on the increase of cash flow?


Everyone has a unique financial situation and family dynamic. Most financial decisions are not about maximizing your bank account, but maximizing the opportunity in life money gives you. In the end, it could be hard deciding how to allocate your extra cash but a little help and guidance goes a long way.

 

Want to know more about how a financial plan could help you? Click on the clock below to set up your next meeting!


MyLife Financial is a fee-only financial advisory firm providing objective and independent advice virtually. Our clients are busy professionals that face daunting questions of how today's financial decisions will affect their long-term financial success. Everything written is strictly for informational use only. Please seek the advice of your CPA, Attorney, or financial professional before implementing any strategies.

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