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Got Cash? What to Do with Extra Money

A reader asks what to do with her extra cash. Laura recommends an action plan called PIP that can solve just about any financial dilemma. 

By
Laura Adams, MBA,
October 7, 2015
Episode #421

Page 1 of 3

Got Cash? What to Do With Extra MoneyMy QDT editor, Alyssa, was recently talking to her best friend about a financial dilemma. Erica, who is 28 years old, has accumulated a lot of savings, but she has no idea what to do with it. So Alyssa told her to email me for an answer.

Erica says, “I've saved up $40,000 over the past two years, but it’s just sitting in my checking account. I know there must be a better place for it, but I'm torn between investing, paying off student loans, or saving for a house.

I contribute to a 403b retirement plan through work and have about $85,000 in student loans that charge 4% interest. Is there a rule of thumb for how much of my savings I should use for these different purposes?”

In this post, I'll recommend a specific strategy to follow any time you're not sure what to do with your money.

Free Resource: Laura's Recommended Tools—over 40 of the best ways to earn more, save more, and accomplish more with your money!

What to Do with Extra Cash

First, I want to congratulate Erica for being such a terrific saver! There are worse problems to have than not knowing what to do with a flush bank account. Nevertheless, it can be unsettling to have a lot of money sitting idle.

No matter if you’re a good saver or you get a cash windfall from a tax refund, an inheritance, or the sale of a home, it’s a major opportunity in your financial life. So I want to make sure that you don’t squander it.

In order to know the right way to manage your extra cash, you need to step back and take a holistic view of your entire financial life. Consider what you’re doing right and where you’re vulnerable.

Maybe you’re like Erica and have extra cash that could be working harder for you, but you’re not sure what to do with it. You may even be paralyzed and do nothing because you have a deep-seated fear of making a big mistake with your cash.

In some cases, having money sit idle is exactly the right financial move. But it depends on whether or not you’ve accomplished three fundamental financial goals, which I’ll review in a moment.

In order to know the right way to manage your extra cash, you need to step back and take a holistic view of your entire financial life. Consider what you’re doing right and where you’re vulnerable.

In order to make good financial decisions, think about using a 3-pronged approach. I call it the PIP plan, which stands for:

1.    Prepare for the unexpected

2.    Invest for the future

3.    Pay off high-interest debt

Let’s examine each one so you understand how use the PIP (prepare, invest, and pay off) approach for your situation.

How to Prepare for the Unexpected

The first fundamental goal you should have is to prepare for the unexpected. As you know, life is full of surprises. Some of them bring happiness, but there are an infinite number of devastating events that could hurt you financially.

In an instant, you could get fired from your job, need to travel to see a loved one, be the victim of theft, get an oversized tax bill, experience a natural disaster, get a serious illness, or lose a spouse.

Being prepared for what may be around the corner is a work in progress. It should change over time because it depends on factors like whether you have a family, your total amount of debt, and your income.

While no amount of money can reverse a tragedy, having safety nets—like an emergency fund and insurance—can protect your finances. That will make coping with a tragedy much easier.

Everyone should accumulate an emergency fund equal to at least three to six month’s worth of your living expenses. For instance, if you spend $5,000 a month on essentials—like housing, utilities, food, and debt payments—make a goal to keep at least $15,000 in an FDIC-insured bank savings account.

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