Too Much Cash
It is definitely a first world problem. Too much cash. Many people wish it was one of their problems. It’s a good one to have if you have to pick a problem in life. But it is a situation that requires some consideration. Lately I have had several clients come to me in this dilemma and it’s important to understand what these clients are really saying.
They are in a place where they spend less than they make. (This is actually my number one piece of financial advice for everyone–spend less than you make!) It can be overwhelming for them to know what to do with the extra cash they aren’t spending.
The real problem they have is analysis paralysis. There are too many options for what they could do with this cash. Should I use it to pay down debt? Should I save it for retirement? Should I put it aside to help pay for college for my kids? Should I buy a bigger/nicer house? Should I sign up for a peer-to-peer lending site and start loaning it out? Or should I just leave it in the bank so it’s safe? Faced with so many options and for fear of making the wrong decision, they make no decision at all.
In case you’re fortunate to find yourself with this problem today or someday, let me give you the Top 5 things to do with your extra cash.
Emergency Fund
Make sure you have enough set aside in your emergency fund. “How much” is different for each person and there are several different opinions from financial professionals out there. Dave Ramsey says to start with $1,000 as your goal. Others say $5,000 as a minimum. Most people say 3-6 months of expenses is a good reserve amount, but that can be a big range. How do you know what is right for you?
Generally if you have one source of income you want to save up six months of your inflexible expenses. These would be debt payments, groceries, utilities, gas, etc. This does not include vacations, new clothes, or other expenses that could be delayed. If you have multiple sources of income (two working spouses, investment properties, or something similar) you can save closer to three months of your inflexible expenses. And if you are a Federal government employee you may want to save a little extra to get you through the next shutdown.
And where should you keep this money? In a high-yield online savings account. This is not money to invest or take risk. You will get a low return on this (about 2% with current interest rates) and that is okay.
Insurance
You need to make sure you and your family are adequately protected. Most people are covered for their home and auto insurance but rarely think about life or disability insurance. Look at your workplace benefits to see if you have any life or disability insurance and how much coverage you have. Then evaluate if it is enough.
For disability insurance, most clients I meet with have coverage through work that will cover 60% of their income if they become disabled. Will this be enough for your family to live on? Remember that if you become disabled you still have to save for retirement and most people don’t factor that in when considering coverage. Each situation is unique and it is worth meeting with a specialist to analyze your coverage and options. An insurance agent can certainly sell you more disability insurance, but a good fee-only planner can objectively tell you how much is adequate for your situation.
Life insurance is similar. Many people have a small amount of coverage through work, maybe 1x your salary. This is generally not enough. There are a lot of opinions out there for how much life insurance you need, but the best way to figure this out is to have a retirement model that works for you and then use it to analyze your life insurance need. I have also had plenty of clients who have gotten to the point of financial independence that they don’t need life insurance anymore.
High Interest Rate Debt
If you have credit card debt or other high interest rate debt, pay it off now! I’m okay with clients paying 2% for an auto loan, or even 5% for a mortgage or student loans. But if you have debt that is over 6% you need to pay it off ASAP. High interest rate debt is a weight that is killing your progress towards financial freedom.
Retirement Savings
After you have done the above steps, get your retirement savings on track. A general rule is that you should save 15%-20% of your income for retirement. Another general rule is that you want 25x your expenses saved up by the time you retire. Truthfully though, the amount you need to be saving is unique to each person based on spending habits and what your ideal retirement looks like. It’s worth the cost of a good fee-only financial advisor to help you get on the right path here.
Future Goals
Once your retirement savings is on track, start thinking about other financial goals! Is it paying for college for your kids or grandkids? Is it a European vacation for the whole family? Buying a vacation home? When you have steps 1-4 taken care of, you can start planning for the possibilities that a well-planned life provides.
If you want guidance through this process to make it personal to you and your unique situation, I’d love to help! Reach out to me and we’ll start this exciting journey together.
