Recently I wrote about the dangers of having too much cash in your checking account. If you find yourself in that situation, here are some steps to take to make your money work for you.
Shore up your finances
Do you have an emergency fund?
For the longest time, my emergency fund was my checking account. We always kept a few thousand more in checking than we needed, occasionally moving money into investments if it felt right. Unfortunately, financial planning by “feeling” most assuredly limited our gains over time.
If you have excess cash and don’t have an emergency fund, determine how much you pay in expenses each month. Then depending on the stability of your job and your comfort with risk, put aside three- to six-months of expenses in a separate account. While you can save at your local bank, look at online-only options or money market funds that may provide higher rates of interest. My current online savings account is paying 4.00% (Dec 2022).
Are you paying interest on your credit cards?
I hope that if you have cash sitting around you are paying your credit card bills in full each month. If you are paying only a portion or worse – paying late – it’s time to get your high-interest debt under control. Pull out your most recent bills and tally up both the amounts you owe and the interest rate you’re paying. Then, starting with the highest interest bill, start making larger payments – or pay it in full if you can – until you are current on all of your credit cards.
How’s the retirement plan coming along?
Sometimes we get comfortable with cash. I know I’ve had difficulties in the past moving cash to investments. This is where automatic investing can come in handy. If you have a retirement plan through work, and are not contributing enough for the company match, increase your withholding immediately. If you are receiving the full match, consider increasing your withholding to 10-20%. This won’t reduce your current cash bundle, but will add less with each paycheck (and will automatically move some of your money into retirement investments).
Are the kids set for college?
One of our goals with college for our kids was to provide a loan-free option that they could choose if they wanted. Our state covers 100% of tuition payments for students who earn certain grades in high school if they attend an in-state college or university. This does not include room and board, books, and other necessities. So while we hoped that they would earn the grades necessary for the full tuition ride, we also put money into 529 plans for each of them when they were toddlers (adding to the amount over time) to cover the rest.
If you aren’t saving for your kids’ college expenses, take a look at your state’s 529 plan. Many offer tax credits for participating in the plan. Also research top 529 plans online to see what the experts look for in a good plan. The plan you choose should definitely have a variety of fund options at low costs to you.
What’s your dream?
If you’re already saving a healthy percentage for retirement and your kids’ college, and you have an emergency fund that will see you through almost any crisis, maybe it’s time to look deeper at your goals. Have you always wanted to start a business? Extra cash can be used as seed money to start the business. But it can also provide you more time – maybe you hire a landscaper or home cleaner – to manage and grow your side-hustle.
Some people want a vacation home. It’s true, interest rates are higher than they’ve been recently. But historically, 5-6% isn’t a bad rate. Plus, real estate buyers have more options to choose from and can negotiate better deals compared to this time last year. Maybe it’s time to look again at a beach condo.
How to motivate yourself
Like I mentioned above, in the past I’ve been very comfortable having some padding in my checking account. There’s nothing wrong with that. But even in these challenging markets, I’ve forced myself to invest for the future.
Let past mistakes guide you, not stop you
I’m not 20 out of 20 in my investing career; sometimes, my investments have been either badly researched or ill-timed. That has made me hesitant to invest in the current market. I mean, you think stocks are back to a growth pattern and then wham, there’s another 10% drop. Yet by focusing on past mistakes, you ignore what many consider to be a great time to invest. Stocks are on sale, valuations are down, and inflation seems to be subsiding. Try to look forward instead of remembering all your past investing mistakes.
Make sure you’re comfortable with your plan
Sometimes you make mistakes because you think you’re one thing and yet act differently. In other words, you may consider yourself risk-averse and then will sell when the markets tank and pundits start their doom and gloom articles. Now is the time to be honest. You’ve just seen markets tank due to Covid, rally, then tank again. How are you doing? How are you sleeping? If you really aren’t able to handle the volatility, putting your money back into risky investments would be hard for anyone.
All in? Or a little at a time?
I’ve read reports stating that if you have a set amount of money to invest, it’s best to do so in one fell swoop. Studies looking at past market movements have shown that you earn a better return from this practice, even when the markets drop soon after you’ve purchased. Of course, this means you have to be able to stay invested if your new-found purchases drop.
Others say to dollar-cost-average, investing the same amount at the same time period. For instance, if you have $10,000 you could invest $1,000 per month for 10 months, or $500 per month for 20, in the same investment. This has the advantage of buying more shares when the stock price goes down and less when the stock price goes up.
I will buy at the absolute low
In a market where prices seem to fall almost every day, no one wants to buy and then see their investment immediately lose hundreds or thousands of dollars. It’s easy to turn into a watcher instead of an investor; my stock was at $17.50 last week, I’ll wait until it’s below $17.50 to buy. Sometimes people manage to buy at the absolute bottom price, but it’s due more to luck than any skill, and often people are left watching the price rise until they are no longer comfortable buying the stock at all. If you think the price could go lower, dollar-cost-averaging might be a better way to invest with some insurance that you aren’t buying at an inflated price.
I’ve faced the same challenges that have stopped many of you from investing. Sometimes I say I’ll dollar-cost-average then pile more money in when the price is low. Other times I will choose to invest a lump sum and find reason after reason not to. I’ve learned that once I find an investment, it helps to make it automatic to take some of the emotion out of the decision.
Photo by Tima Miroshnichenko