What should I do with all of this cash?

Have you ever found yourself sitting on way too much cash? Maybe you received an inheritance, a large bonus at work, cashed out employee stock, or maybe you’ve simply been saving for awhile and you aren’t really sure what to do with it. 

You know that it isn’t earning anything sitting in the bank, but what’s the alternative? Here are five areas to focus on improving your financial situation with the excess cash.

Establish an emergency fund

The most important basic foundation of getting your finances in order is to make sure that you have an adequate emergency fund. An emergency fund should be liquid cash in a savings account that you can access in a pinch. Everyone’s situation is unique, but you should maintain approximately 3-6 months of living expenses in your emergency fund. The idea is that it could take that amount of time to find a new job if you’re without income.

 It’s easy to try and skip this step because of the low rates currently on savings accounts. A good option to at least maximize the rate is to look at an online savings account where they tend to offer slightly higher interest rates than a traditional bank.

Short Term Goals

If you’re planning any major expenses in the short term that you’re needing the cash to fund then you should also keep that in cash. Short term is pretty much anything you’re planning in the next 5 years. This would cover a lot of goals such as a down payment for a house, a wedding, new car, etc. If you need the cash within 5 years then you don’t want to risk the funds by putting it into the stock market. 

Over the long term, the stock market is undefeated but it’s too volatile in the short term to put those funds at risk.This could also be in an online savings account, but probably in a separate account from the emergency fund so that there’s a clear boundary on the emergency fund.

Pay off high interest debt

Most millennials have some sort of debt. Credit cards, student loans, mortgage, etc. 

If you’re carrying credit card debt or any other high interest debt higher than say 7-9% then you should pay it off or down as much as possible after establishing the emergency fund and hitting your short term goals. Some might argue this should be a higher priority than the short term goals. My reasoning for this is if you focus on paying down the debt then you might look back to high interest debt to fund those short term goals anyway and restart the negative cycle of accruing bad debt.

Student loans and mortgage are trickier. These loans are often referred to as “good debt” and it might not make the most sense to pay them off as quickly as possible. As long as you have the cash flow available to cover the ongoing payments then carrying a low interest debt isn’t the worst thing. You should discuss your specific situation with your financial planner.

Invest

You’ve set aside cash for the emergency fund and the short term goals and paid off the high interest debt, what now? Now it’s time to focus on your long term goals which requires investing the funds. There are many different types of accounts and the mix of investments will vary depending on your personal circumstances but two important strategies to consider when investing cash are: dollar cost averaging and lump sum investing.

Research shows that it is most beneficial in the long run to invest the funds immediately all at once regardless of how the market is doing. 

The human element is a little trickier. Despite what the research says it can be quite frustrating to invest a lump sum of money into the market and a day later watch it lose 10%. If you are unwilling to accept that risk then there is an alternative option which is to invest the cash over a period of time, called dollar cost averaging, where you set up automatic investment purchases over a defined period of time.

For example, if you have $100,000 of cash to invest you might choose to invest $25,000 each month for 4 months. Or $10,000 for 10 months.

It works best to automate the deposits and investment purchases so you don’t need to think about it and don’t delay purchasing based on current market conditions. The benefit to this strategy is that if the market goes down after your first deposit, then ideally you’re buying at a lower price in the second month, etc.

Have some fun

Don’t forget to take 1-5% of the bonus, inheritance, etc. to spend on yourself and enjoy it. No questions asked. Take a trip, go to that concert, buy that new piece of gym equipment for your garage… I don’t care what it is, but give yourself permission to do it. 

What’s the point if you never stop to enjoy it a bit?!

Disclaimer: This blog shouldn’t be considered advice, or recommendations. If you have questions pertaining to your individual situation you should consult your financial advisor.