Are you a diligent saver? Always looking for good deals? And constantly making sure that your expenses are in check? If so, there’s a pretty good chance that your bank account keeps growing every month. And soon enough, you’ll stockpile a decent amount of cash. But do you have too much cash?
I know what some of you are thinking: “Scott, I can never have enough cash!” I get what you’re saying. Having too much cash is a good problem to have.
But it’s important that you make sure your money is working as hard as you are. And if it’s just sitting in the bank earning you next to nothing, it isn’t working hard enough.
If you find yourself in this situation, here are three questions you should ask yourself.
1. Is my emergency fund fully funded?
Even if feel like you’ve built up a lot of money, is it enough to cover your expenses for 3-6 months? 3 months of expenses is the absolute minimum that I would encourage you to have in a savings account as your emergency fund.
The sole purpose of your emergency fund is to give you a cushion in case your car breaks down, you get injured and have hospital bills, lose your job and need a couple months finding a new one, etc.
And to be clear, this account isn’t for splurging on a TV, new clothes, on a fancy vacation. Do everything you can to not touch it until you absolutely need it. And if you ever do dip into it, refill it as soon as possible.
2. Are there any debts I should pay off?
If you’re like one of the 30 million people under the age of 40 who has student loan debt, is now a good time to start paying extra on them?
Or should I instead pay off that car loan?
Or that pesky credit card that you took out during the holidays?
I can’t tell you the exact strategy to take without knowing the specifics of your situation and the debts that you have. In some cases, it might make sense to continue making the minimum payments throughout the life of the loan. Or in the case of a credit card (which average a 16.15 interest rate), it might make sense to pay it all off as soon as possible and be done with it.
Either way, make a plan for your debts that makes sense given your interest rates, income, and monthly expenses.
3. Should I Increase What I’m Saving For Retirement?
Many of us have heard about the benefits of saving for retirement early. By starting early, you’re able to lessen the amount you need to save later in life.
Let that sink in for a minute: By waiting a decade to save for retirement, your retirement account will only grow to half of what it could have been if you had only started earlier.
When you’re on board with saving for your future self, determine what is the best place to save for your retirement. It might be in your company’s 401k, especially if they provide some kind of matching contribution. Or, it could be in some kind of individual retirement account.
Once you have that figured out, start investing and keep investing on a consistent basis. If you do that, you’re going to put yourself in great shape for your future.
So what do you think? What have you done when you’ve realized you had too much sitting around in cash? I’d love to hear what you’ve done. You can email me at scott@dev-forthrightfinances.pantheonsite.io, call me at 424-258-4460, or contact me here.