What Should You Do with Excess Cash?
If there was ever a year filled to the brim with uncertainty, it was 2020. There were lockdowns, quarantines, and millions of people unexpectedly losing their jobs.
When the economy is in flux, most people tend to ramp back their spending and save as much of their income as possible. Plus, you might have extra money set aside from the stimulus checks, child tax credit, or the payment and interest freeze on student loan payments.
Many Americans significantly increased their savings — the Federal Reserve Bank of Kansas City found that savings rates nearly quadrupled from March to April of 2020.
This has lots of people asking themselves, “What should I do with extra cash?”
1. Pay off high-interest debt
One of the best answers to “what to do with extra cash right now” is to pay down any high-interest debt. High-interest debt usually has an interest rate above 6% — but some credit cards can have rates up to 20% or more. Higher rates make your debt more expensive, and you’ll end up paying more over the long run.
If you have outstanding credit card balances or personal loans, pay them off as quickly as possible. The longer you let the balances sit, the more interest they’ll collect. By wiping your financial picture clean of high-interest rates, you can focus on more fulfilling financial goals.
2. Add to your emergency fund
Most financial experts recommend having an emergency fund. An emergency fund is money that is set aside to cover any emergencies or unexpected expenses. For example, you might lose your job and need the cash to cover your mortgage or rent payment — or maybe you have a large medical bill.
How much you have sitting in the bank depends on your financial situation and risk tolerance. However, many financial professionals recommend having enough to cover three to six months’ worth of living expenses.
3. Max out your retirement account
While 71% of workers have access to an employer-sponsored retirement account like a 401(k), only 55% are investing in one, according to a 2020 news release from the US Bureau of Labor Statistics.
If you’re wondering what to do with extra money each month, consider putting your excess cash toward your retirement planning goals. You might even max out your annual contributions:
The maximum you can contribute to an Individual Retirement Account (IRA) in 2021 is $6,000 (or $7,000 if you’re over 50).
The maximum you can contribute to a 401(k) in 2021 is $19,500.
Consider contributing to a back door Roth IRA.
However, if you don’t have a retirement account set up or aren’t regularly contributing to it, ask your employer about their retirement benefit options or open an IRA.
4. Save for your kids’ college
It’s never too early to plan for your kids’ college tuition costs. In fact, the earlier you start adding to an account, the more time you’ll have for the money to grow and compound. One of the best accounts to use for college savings is a 529 plan, even if you only have a little extra money to set aside.
The plans are typically sponsored by state governments and come with tax benefits — many states let you deduct your contributions from your state tax income. You can use your state’s 529 plan, but you don’t have to. For example, if you live in Missouri but like Kansas’s plan better, you can save using Kansas’s 529 program.
5. Start a Future Opportunity Fund
Finally, one of the best uses for excess cash is to start a Future Opportunity Fund. A Future Opportunity Fund is simply a brokerage account you use to grow your nest egg and increase your net worth. Then, you can use the funds for just about anything you want — it can change your money mindset and help you achieve your financial goals and wishes.
Here’s why it’s a good idea: Retirement savings like 401(k) accounts and IRAs are specifically earmarked for retirement, which means you won’t see that money until you are 59 ½ years old. On the other hand, emergency funds are meant for emergencies, so they act as a financial safety net if you have a job loss or unexpected medical bill.
However, you have a lot of life to live between now and 59 ½. Think about this: What if ten years down the road, you want to:
Start a business
Buy a vacation home or rental property
Take up a new hobby that’s a little more expensive
Even save so that when the next big home project, vacation, or investment opportunity presents itself, you have the financial capital available
These are all perfect examples of how you might use your Future Opportunity Fund.
Additionally, since you’re already saving for retirement, you can be more aggressive when you have extra money to invest. In addition to traditional investing in stocks and bonds, you might invest in a business, private equity, or real estate to grow your Future Opportunity Fund.
The best part is that you don’t need a goal in mind when you start. You can open it and add to it until the right opportunity presents itself. When that time comes, your Future Opportunity Fund will be ready and waiting.
We hope you found this article valuable when deciding what to do with your excess cash. If you’re interested in getting help with saving or planning for future costs, contact a financial planner to review your options and see how to make your financial dreams a reality.