Keeping too much in cash can end up hurting you more than helping you financially.
Tune into our new episode and hear how to evaluate different options for what to do with your money after meeting your emergency savings goals.
Brenton: [00:00:00] It's crucially important for high income earners to have a fully stocked emergency fund, but what do you do once you've met those savings goals?
Tune into this episode and find out.
Hello, my name is Brenton Harrison of New Money, new Problems, and your host for the New Money New Problems podcast. If you've been joining us in this series, we have been talking about the importance of having at least one month's reserves as a high income earner or any income earner. And then we talked about getting to the minimum expectation of three months expenses in a high income household. And after that we talked about how to determine what is the actual stopping point where you can say that you have enough set aside in cash. The purpose of that decision being that you establish a line in the sand where you understand that saving money beyond that point strips you of the ability to have your money working for you while you are not working.
So in today's [00:01:00] episode, we want to talk about that journey from you either getting to three months expenses and trying to reach your end savings goal, which you might have determined is six months expenses, or nine months expenses, or a year worth of expenses if you have a large upcoming purchase. And we also want to address those who might feel that three months is enough.
And in both scenarios, you have now gotten to the point where, in my opinion, you can start to divert some of those monthly resources towards other financial goals as well. Whether it be putting extra money on a credit card or resuming your retirement contributions, maybe putting aside some money for a side hustle that you're pursuing.
Once you've met that three months expenses saved, even if you're continuing to journey past that point, you can start to evaluate, in my opinion, some other financial goals and or concerns that are a part of your financial picture.
And as part of that process, I thought I would give you some things to consider when determining whether you're going to have money [00:02:00] allocated to other places as you continue to save. And later on I'll give you an example of how you can split your resources to make sure that you have one arrow that's hitting multiple targets.
One of the first considerations I have when determining where to allocate funds is where I can get the best return on the dollars invested or contributed.
And when I say return on investment, I don't want you to only think about the percentage return. That is a consideration. If I'm going to put an extra a hundred dollars, 200, $300 a month towards something, I have to make sure that the potential return in terms of how that fund or that investment is allocated, is not only something that I want to pursue, but also fits my risk tolerance. An example might be I'm not going to put an extra two, $300 a month towards an incredibly risky investment if I just got to my three months expenses saved because I'm not yet to the place where the amount of money I have in reserves gives me the [00:03:00] flexibility to pursue extremely high returns in exchange for extremely high risk.
So percentages do have a place in the conversation, but another element of the best return on investment conversation also has to do with the amount of dollars going into the investment itself, and that puts retirement savings back onto the table.
If you have an employer who matches retirement contributions, one of the things that was probably hardest to grasp in these earlier episodes was the idea that it could benefit you financially to stop contributing to retirement, because you might be thinking that by doing so, you are leaving money on the table from your employer and you are correct.
Now as you built towards that one month expenses saved or three months expenses saved, the importance of having an emergency fund took priority over leaving money on the table in a retirement account that you can't access in most cases until age 59 and a half. But now you have a semblance [00:04:00] of an emergency fund. And if you're able to put 3% of your pay or 5% of your pay aside and have that money matched, immediately doubling your contribution in size. That is a significant return on an investment.
And that immediate doubling of contributions is a significant factor in determining whether, after meeting that three months expenses saved, you should start dipping your toe back into the waters of retirement contributions.
Now that's on the contribution and investment side. Now let's look at the debt side and consider the return on the investment that you could have by putting extra money towards certain debts.
If you're struggling with cash flow now or have done so in the past, then that journey from three months expenses saved to whatever is your end destination should look at the immediate impact that you could have by eliminating certain debts.
I say immediate impact so that you have in your mind the debts that you are closer to paying off than [00:05:00] others. This is not the time on the journey from three months to your end destination to start putting an extra a hundred or $200 a month on a 200,000 or $300,000 student loan, or a 300,000 or $400,000 mortgage. That will not provide an immediate or even intermediate return on investment as it relates to cash flow.
But if you have a car loan that maybe you owe 10,000 or $20,000 on and you're paying 600 or $700 a month. If you have credit cards And you're paying five or 600 or $700 a month towards them then putting extra money and allocating funds to those debts could, in a shorter period of time, lead to a significant improvement in cash flow.
As an example, let's say I have a credit card that throughout this journey I've been making minimum payments towards and I owe $3,000 on that card. I could decide whether to put money in my 401k or to put an extra, [00:06:00] say, $300 a month towards that credit card payment.
The 401k, it is important, and I can double my contributions by having those funds matched by my employer. But by putting an extra $300 on that credit card, I could save myself hundreds of dollars in monthly cash flow in less than a year's time. That doesn't mean that I decide on the card versus the employment account, but it means it's a part of the conversation.
The next consideration when determining where to allocate extra funds is the type of access that you need of those funds.
I've told you as a business owner that when I have extra money in my pocket and I have the option of either putting that money towards my retirement or plugging it back into my business in a way that increases its valuation or increases its annual recurring revenue, I typically am going to choose to plug it back into my business.
I place priority on having access to my funds in a way that could benefit me in the here and [00:07:00] now.
You might be the type of person who's trying to pursue real estate and you want to have funds available to you so that you can put a down payment on investment property X, Y, Z. In these cases that need for access might take priority over you potentially leaving money on the table by not fully participating in your company match for a retirement account.
And all of these things and these considerations bring me to the last question. And that question is, what type of wealth do you want to pursue?
I'm the type of person that doesn't think there is a wrong way to attain and pursue wealth.
You have people out there who demonize people with nine to five jobs and act like entrepreneurship is the only way to go. But if you're the type of person who does not find entrepreneurship attractive, there is nothing wrong with you pursuing wealth by utilizing the employee benefits at your disposal. Things like your hsa, things like restricted stock units, stock options, and importantly, your 401k or 4 0 3[00:08:00] .
You may not want to have a side hustle. You may prefer to focus on improving your craft, increasing your salary or your hourly rate, and utilizing and capitalizing on what's in front of you. And if you are that person, you can be tremendously wealthy by following that path to success.
Conversely, you may be the type of person who hates working for other people, or maybe you just have an idea about which you're extremely passionate and you want to pursue entrepreneurship.
You want to pursue side hustles. You're fine with the lack of a safety net that comes with not having that W2 employment. That's perfectly fine as well.
But it may mean that when faced with deciding where to allocate funds, that just like me, your priority should be on funds that could help you in the here and now as you continue to grow that business.
There is no right answer. There is no wrong answer. There is no all the time right answer. There is no all the time wrong answer. There is an answer that is right [00:09:00] for you right now. And that answer may change as you evolve as a person, as your family structure evolves, and even as your career evolves.
And after the break, we'll tell you once you found your priority items, how to make sure that you can address both your savings until you've met your savings goal, and also that new priority in your financial life.
Welcome back. Before the break, we talked about how to identify elements of your financial life to which you might want to allocate more resources, once you've met that minimum expectation of three months expenses saved.
Well, now it's time to talk about how much money should go towards those goals. And to do so, you have to first decide what is that line in the sand where you're going to stop saving in cash.
This is the most important reason that I'm asking you to determine a final savings goal, because to determine that savings goal is to say that once we have reached this number, unless we [00:10:00] have an upcoming purchase that necessitates more money in cash, we are not going to continue to stockpile money in this account moving forward.
If you've decided that six months is the goal, then once you've met six months, you need to stop automatically saving into that account, and you need to divert these extra funds towards some of these priorities that we discussed before the break.
As an example, let's say that I have met my three months expenses goal, and to this point, I've been saving $300 a month every month until I met that minimum expectation. Maybe I've decided that after reaching that goal, six months is going to be the line in the sand upon which I'm going to stop putting money in cash savings.
Well, I'm gonna still have $300 a month that I'm allocating to my finances, but now I might decide to have a portion going to my cash savings and a portion going to the other financial priorities that I determined before the break.
Maybe one of those financial priorities is [00:11:00] resuming my retirement contributions, and another may be to pay down a credit card that's been given me hell for a number of years. Maybe I take that $300 a month and I have a hundred dollars going towards cash savings.
I have a hundred dollars going towards my retirement account and a hundred dollars going towards that credit card. I might continue with that path until I've met six months savings. And once I've met six months savings, remember, I'm going to stop saving in cash, but I still have $300 a month. Now I can split that $300 amongst those two priorities and have 150 going towards my retirement savings and 150 going towards that credit card.
Eventually that credit card debt will be repaid. Now I have $300 that I can put directly towards my retirement savings, or maybe there's another financial priority that I've been waiting to address until I got that credit card bill out of the way.
And in doing so, not only can I have a part of that $300 [00:12:00] go towards that new priority, I also don't have a credit card payment anymore. So maybe now I have 400 or $500 that I can allocate between my retirement account and another financial goal.
This stair stepping process of allocating money to your financial priorities based on their importance, it forces you to have some tough conversations, either internally or with your partner or spouse.
The first conversation is, what is my financial priority? If you are an individual, that's a very tough thing to do anyways. If you're in a relationship, you have to be on one accord in terms of what your collective priority is financially, and trust me, that's not easy.
It also forces you to ask questions about the type of investor you want to become, the type of wealth that you want to attain and the journey you're gonna take in doing so.
And lastly, once you've met those objectives and met that final savings goal, it takes away that sense of [00:13:00] comfort that in the long run may be hurting you. And that sense of comfort is the fact that as long as money is going in cash, it's safe, and you know it's there.
But in reality, the more you stock in cash, the less you have working for you. And right now, you may not know some of the things that you can use to have that money working for you. It may be daunting to find those things, to research those things, to understand those things. But once you've met that line in the sand, it pushes you past that place of comfort and into the world of gaining more knowledge as it relates to what's out there in this financial world. And in the next episode we're gonna talk to you about one of those tools that you can use by going deep into the definition and the inner workings of a brokerage account.
I'll see you then.