So you actually have money left over each month after retirement contributions and childcare, the mortgage, utilities, food, and loan payments. Now what? If you invest in your retirement and only have low interest loans, then you can think about other savings and investment options.
Some caveats first.
- I think car loans are OK – with the right term and interest rate. Not all debt is bad. For my current and prior car, I got three-year loans with 0.9% interest. It was worth it to have the loan rather than part with more cash up front. Then I could invest more cash. I think three years is a good car loan timeline. A four to five year loan gets long, especially if you don’t plan to drive the car until it dies. The reason being you could reach the end of five years and then you are already looking at other cars. However, if you keep your cars ~10 years, once you pay it off, you still have five to seven years with only maintenance and repair costs. Remember to put enough down upon purchasing so that you don’t risk being under water, in case of an accident.
- Student Loans are OK to – with the right interest rate. I paid off my MBA loans before my twins were born. I felt my rate was in the grey area. Every semester except my 1st was funded by un-subsidized loans, at 6.8%. While the market usually makes at least 7-8% if not more, I felt given the interest accrued from day one, it was better to get rid of them. That said, while debt payoff positively impacts your net worth, it negatively impacts your cash flow. That’s why a lot of personal finance folks say to increase your emergency funds during periods like the present, when student loan payments are paused and interest rates are waived. Cash is always king and during uncertain times, it’s always good to increase your buffer in a high-yield savings account (Capital One, Ally, Marcus, etc).
So, now on to the five options for excess cash.
- 529. If you want to help your kids pay for college and expect at least one of them to attend a 2-year, 4-year or technical program, a 529 is a good investment to set up. It can be very overwhelming, but it doesn’t have to be. You can start with a small amount, and invest in College Target Date Fund. Once you have a chance to evaluate the investment options, you can always rebalance into specific funds, if you find others that have lower fees and higher average returns.
- Roth IRA. If you already max out your workplace 401K, or at least invest up to the employer match, consider a Roth IRA. If your household income eliminates this option, you can contribute to a standard IRA. Down the line, you have the option of converting via a back door Roth IRA when your income tax rate drops.
- Emergency Fund. This may have a different definition for many people. For me, an emergency fund would supplement unemployment if me or my husband lost our job. Most people say to aim for 3-6 months of fixed expenses (mortgage/rent, lights, heat, car loan, food, credit card payment, etc). If that’s overwhelming, start with one month and increase from there. This can be an ongoing goal, with an auto-transfer from checking to savings every two weeks.
- Vacation Fund. Are you eager to travel too? I am ready to get on a plane as soon as I get vaccinated! Get me out of here! Let’s plan for it, even if it’s just to visit family and not a tropical getaway. Factor in flights/trains/gas/tolls, as well as hotels and food. Look for FDIC-insured banks that allow for multiple savings buckets, such as Capital One and Ally.
- Home Repairs & Renovations. Be prepared and set aside a small amount each month for home repairs and medium-term renovation plans. When I moved from a 2-bedroom condo to a single family home, I was aware there would be more maintenance work. I was surprised by how much more work it is to maintain a large house. We have a big yard, a long driveway and a small wooded area. That translates to mowing, plowing, and pest control, in addition to heating, cooling, and maintaining a large house. We all hope we have many more years left on our roof, that our boiler doesn’t break, and that the gutters can be ignored. The list goes on. It’s better to be prepared, even if you can only sock away $500 to start and you add to that slowly and consistently.
What do you do with excess cash after bills are paid? Comment down below!
*This information is for educational purposes only. Any posts on BudgetReboot.com are made solely in the author’s opinion and do not constitute professional financial or investment advice. Please contact a licensed CFP for questions about your loans and investments, and talk to a CPA for tax questions.*