That was an EXCELLENT question I got from a reader recently, and it’s one most of us often wonder about ourselves. And one that usually means we’re doing pretty well too :)
The people asking this question are currently at #3 of the Cash Flow Categories™:
- You’re losing money every month/paycheck
- You’re breaking even every month/paycheck
- You have more money coming in than coming out every month/paycheck!
- You have a RIDICULOUS amount of money coming in vs going out every month.
#1 sucks the most but we’ve all been there at some point in our lives. #2 means you’ve at least got the ship back upright again and now humming along in place. #3 means your ship is finally starting to move forward towards your goals! And #4 means you’ve already crossed the finish line and you’re now in uncharted waters… with much more money on your hands than you know what to do with.
Most people fall into categories #1-#3 :)
But I digress…
Question time.
Here is the first question I was asked in this reader’s email, followed by my thoughts and answers on a couple other questions as well… hopefully they help you too?
Once all the bills are paid off (not the house, other bills like cars, credit cards, etc.), how do you prioritize what to do with your money?
J$: It depends on my goals at the time, but usually all my “extra” money goes right towards investments unless something super important or scary comes into the picture. Like losing a job or depleting an emergency fund/etc. Provided we have no consumer debt though and a flush e-fund, here’s the order of where our extra money would go. Prioritized to take advantage of all retirement tools at our disposal:
- Put money into 401(k) up to the employer’s match to reap all FREE money! (Or, in my case, SEP Ira since I don’t have a 401k)
- Max out my Roth IRA
- Go back to my 401(k)/SEP Ira and max that out too
- WILD CARD TIME!!
Wild Card time is the best. Similar to #4 in our Cash Flow Group™, this is the spot most of us only dream about. It means that you’ve not only got all this extra cash coming in to the tune of $23,000 (since you’ve just maxed out your 401k @ $17,500 AND your Roth @ $5,500!), but you’ve STILL got plenty more to play with! And you’ve covered the most important part already: Retirement.
With Wild Card, your options are endless. And again depends on your goals/dreams/priorities. Here are a few things Wild Card can mean for you:
- Paying down/off your house!
- Starting a new business
- Buying a new business
- Dabbling in more riskier stocks/investments
- Creating an “F You” fund one day for your job (so you can plan out one of these ;))
- Giving generously to causes you believe in
- Funding your OWN causes you believe in!
- Funding your kid’s/grandkid’s college
- Re-investing in your own education
- Buying J. Money a house to thank him for his help :)
And I bet there’s a good dozen or so more you can add to the list of dreams yourself. It’s an incredible phase to be in, and I’ve been in and out of it myself over the past 6 years (currently out of it due to low biz $$ and popping out babies left and right).
Question #2:
I notice when you post your financials that you keep that small HELOC on your house. What decision process did you use in deciding to keep it rather than pay it off with your liquid assets, and why?
J$: It again comes down to goals and priorities. I’m currently in cash hoarding mode due to the aforementioned babies and biz $$, so it makes us more comfortable knowing we have a pot of money saved up for emergencies/daily expenditures/etc shall we need it. When times were (financially) awesome a year or two ago, I was aggressively paying down that 2nd mortgage every single month and DID consider paying it off in one fowl swoop which many readers may remember. Looking back I’m glad I didn’t, but you can only work with what you’ve got at the time.
So ultimately it was another “what’s our top priority right now?” type deal for us, and presently that’s having enough cash in reserves until things turn around. As much as it would give me a financial orgasm to have that HELOC paid off once and for all! Haha… But it’s now a “business” as a rental property anyways, which changes the game too…
Question #3:
Now that our bills are paid, I am struggling with whether or not I should fund 529’s for the grandkids (I’m going to), make principal reductions on our LARGE second mortgage or on our LARGER first mortgage, increase our investments, pad our liquid savings, or do some very necessary and long neglected home repairs…
J$: That’s a tricky one, mainly because I don’t know much about your situation, nor do I know your long term goals (do you see a pattern here? :)). I’d be willing to bet most financial advisors would probably tell you to pay attention to your OWN situation first, and then if/once you’ve got that locked down nicely go ahead and save/invest for others. Even family, cuz you gotta make sure YOU’RE good first.
But of course being a father now myself, I totally get wanting to provide for our kids/grand kids and it’s usually a more emotional than financially-correct thing :) So, personally, I’d probably do a mixture of everything in your shoes. Maybe put 80% of all “extra” money into your own investments/projects/mortgages, and then siphon away some for the grand kids as well. That way everyone wins. But I’m certainly no expert in the matter…
Just remember this one thing: Everything’s temporary. In both life, and in money. So what you work on now can be completely different in what you work on in 12 months, or even 2 months. So I always suggest taking action in the route that makes the most sense to you right *now*, and then adapting as time goes on. Don’t get trapped in analysis paralysis and drive yourself crazy! All those routes improve your life.
Hope this helps a little… To everyone reading this right now :) It’s a good problem to have!
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Cash Flow Categories™ – I made this up. Sounds pretty legit though, right?
[Photo cred: artist in doing nothing]
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Ha! Sounds totally legit. We are investing into home improvements and my side hustles with any extra money for what it’s worth. But it’s easy because we have two obvious places to put the $$. If we didn’t have those it would be investments and an extra vacation or two I’d think. 529s and retirement are already funded out of the normal cash flow.
That’s a good position to be in!
I have been in “cash hoarding” mode the last year as well. My wife and I are planning a move in the next 1.5 – 2 years, and we want to make sure we have both enough in reserve to move through the process of finding a job as well as the cash to take advantage of a good real estate deal should it pop up. I don’t max out the 401K anymore…. not the discussion we are having here though (I do contribute enough for the full company match, however). We do max out both out Roth IRAs, however. The rest goes towards funding the upcoming transition in our life.
Sounds like a great plan. I’m glad you’re at least contributing to your match – we were going to have fighting words if not ;)
In your question #1 what is this ™ all about? Is it from the Rich Dad/Poor Dad? Or something totally different?
I just totally made it up to be funny :) Does sound like something Rich Dad/PD would say and do though, haha… He’s always trademarking everything from what I see.
That sounds totally legit! We’re in the cash hoarding/investing phase right now. We’re essentially splitting 50/50 all our extra cash each month to beef up our EF and to sock away as much as we can in to our SEPs and maxing out the Roth’s. We put a little aside for the vacation fund, but it’s very minimal in comparison.
SExy!
We just changed what we’re doing with our extra money. Today’s post will tell you why :) We paid off our student loan debt! So for now we’re beefing up cash to 6 months. Then we’ll beef up taxable investments to 6 months of expenses. After that we’ll split our extra money between fun, retirement, and extra investments!
As far as funding education for kids/grandkids… unless your retirement funding is on track, I suggest you shore up your retirement situation first.
And frankly, if you pay down your mortgage or other bill, or even overfund your retirement, you may be able to cash flow grandkid’s college instead of putting it in a 529 which has limited options.
Very cool Lance – congrats man!! That’s huge!! You’re gonna have tons of $$ left over every month, just incredible.
I agree that everything’s temporary. Priorities can change so much over the years…especially if you had kids. We worry about totally different things than we did three years ago.
I’m with you J! Straight to investments. I am the spender in my relationship and my wife is the saver. I used to spend all kinds of money on basically nothing…junk. Once I started learning about investing, I changed my direction and started using my “spender” mentality to buy investments. I admit, at first it was probably an unhealthy obsession, but now I have tamed the beast.
So basically I just rambled on in that last paragraph to say that my extra money goes straight to investments. I always have an idea of the next investment I would buy with any extra cash I receive.
Haha, nice… “blowing” money on investments is a nice problem to have :) Even if you do some day trading or get yourself into more riskier stuff – at least you’re learning! (And have huge potential for wins!)
My thoughts exactly!
I love the idea of putting extra money into retirement savings, but I hardly ever do that. Most of the time my wife and I put “extra” money into our emergency savings.
I don’t like having more than $5K in cash, anything above that and I get anxious to invest again. Can be on the market, real estate, buying any asset that will generate cash some day hopefully and appreciate instead of having cash being eaten by inflation.
I wish I was like that (as well as my wife) but we’re too skiddish to stay at $5k… Was totally different when work was more stable and we didn’t have kids though. Perhaps we’ll get there again in 18 years when they’re out of the house? Haha…
We are retired so we don’t contribute to our retirement funds any more. However, we do continue to invest in them by re-investing the earnings. We aren’t taking RMDs yet so those accounts are continuing to grow. So our extra money goes toward other investments that are in taxable :( accounts. Like Pauline said above, my husband gets a fever when we have $5000 cash sitting there waiting to be re-invested, so that’s what happens to most of our extra $$.
I usually split my extra cash between the mortgage and long-term savings. But then last month I bought a car without really doing the math, and had to take some $$ out of the emergency fund. I felt like such a dummy! Now I’m determined to build up my emergency fund a little more before I send “extra” money to the mortgage or long-term savings!
It’s okay, we all do dumb things sometimes. Hopefully you at least got a car you REALLY REALLY like rollin’ in :)
We are saving up for a house down payment, so all the overflow $$$ goes right to that fund. Also like to have some buffer room in some of the bigger “what if” categories like car. We have an emergency fund too, but maybe I’m just risk averse?
Right now all of our extra money is going towards buying J$ a new, bigger house. Unfortunately, we are planning on starting a family later this year and need to shift our priorities to saving more cash for ourselves. I hope you understand. ;)
I’ll give you a pass this time.
We have a prioritized list on what to do with our extra and then what to do when the top goal is hit, and on and on:
1. New-to-Us Car Fund – Gets a minimum amount no matter what
2. Roth IRA’s – Gets the majority of the extra until we hit the $11,000 mark every year
3. Emergency Fund – Once the Roth IRA’s are funded, we make sure this is at the $15,000 mark still or gets the majority.
4. Rental Property Account – This gets a small percentage every month until it is at $10,000, that’s good enough padding for rental home repairs in general.
5. New Car Fund – Once the Roth IRA’s are fully funded and we have hit our target numbers above, this fund gets a larger percentage of the cut. Our cars are 7 and 9 years old and we want to be able to replace them with cash if they die on us.
6. SEP IRA – This is hopefully going to be something we start funding after this year (the goal’s above are a higher priority for us right now)
7. Stocks – This gets a small percentage every month.
8. Mortgage Payoffs – This isn’t getting anything right now thanks to the goals above.
9. Vacation Account – This gets a small percentage of 5% until all of the priorities above are hit.
10. Fun Money Accounts – These get 2.5% each per month. If we don’t allow ourselves fun money and a vacation account, we wouldn’t work so hard for the monthly extra.
Wow, you’ve really thought about this before! Haha…
Sounds like an excellent blog post for your site too :)
Unfortunately, I’m not usually in a position where I’m earning much more than I’m bringing in, so I always maintain my system of asset allocation, even when it’s unexpected or “extra income”. For instance, I don’t devote my whole tax return to one thing, I divide it as usual into my account for paying expenses, my emergency fund, my retirement contributions, and my play fund. Then, within each one of those, I’ll prioritize the things I want to do with the money.
I like that idea :)
Right now our extra money is going toward adoption expenses (hopefully going to happen later this year), but we are also doing our best to put as much money as possible in retirement accounts! Gotta be done with the grind some day…
Oh man, I’ve heard adoption is pretty expensive, bleh… Luckily the kids are nice and cute and always well worth it! :)
Hah. I thought your categories were something I missed in Rich Dad, Poor Dad. I was all, is this part of that game??
I’m solidly stuck in #2 right now, but it’s a world of better than being in #1. It’s easy to start forgetting that so soon after making the transition. I’m just impatient to be full speed ahead instead of chugging along.
You’re the second person to mention RD, PD? I guess I’m so smart that I call things just like he does?? Haha… I hope he doesn’t sue me.
I am hoarding cash right now like a squirrel hoards nuts for a new home purchase, but if I wasn’t then I would be investing it. Maybe I would go on a vacation, but who know.s
Cash Flow Categories does sound pretty legit! You might have a franchise on your hand there. :)
I’m bad with extra money, like tax returns or bonuses. Just the other day, I asked my wife if she wanted to get iPhones with our federal tax return….
Haha… at least you can write part of that off with your blog business :)
We are hoarding cash right now. Paid off the house a year ago! Our goal is $100K in savings (what makes us comfortable)
Holy. Crap. You guys are ballers!
After I’ve maxed out my retirement fund contributions, I throw the excess money into my Vanguard taxable account. A pretty little index fund suits me just fine.
My basic needs are more than met. I do not feel like inflating my lifestyle.
*I’m 24 and I do not have any debt of any kind.*
Rock it, homeboy! And I’ll be moving all my accounts to Vanguard soon too. Pretty excited about it.
Our budget is tight right now, so when we have extra, we currently use it to either add a little to the grocery budget or put toward our debts or savings. Can’t wait to be debt free!
So true that everything is temporary. What we’re doing with our money this year will be different next year because certain debts will be paid off and we will have other things that will become priorities. Personal finance is always evolving.
Right now, my extra cash is mostly going into investments with a small amount being allocated for things I need that I have been putting off. For example, I really need to get my boots resoled. I love them, but I’ve literally got water coming into the bottom when it rains. I’ll have some extra money this month from my birthday, so I’m planning to bite the bullet and get them fixed!
Do people still get things resoled?? I feel like it went away along with writing checks, haha… But I’d imagine it’s much much cheaper than rebuying – so good for you :)
Did you really make up AND trademark ‘cash flow categories’?!? Haha, seems legit. Own it man. As of now any “extra” money goes to debt, or fun money. If it was a large sum, I’d repeat the first line and add investments as well.
You know it! Might as well fake trademark all of your fake ideas right? You never know what fake people might come and steal it ;)
J,
After our retirement I buy individual stocks every month. I’m also looking at buying another rental property so will need to come up with cash for that. We also have our solar loan of 35K coming due at this time next year.
A word of advice for your reader about investing in retirement or 529. Max out all your retirement first and not put any money into a 529 unless you have surplus (which it seems he doesn’t) The reason is a 529 is counted as a child’s asset and reduces his financial aid, while retirement accounts are counted as a parent’s asset and doesn’t count as much. If he’s older the value of the retirement accounts counts less against them. This way your child can max out on grants and subsidized loans.
If you insist on helping out with college than you can withdraw principle after they have received financial aid to help pay living expenses, books etc.
Very interesting, I didn’t know that… I count our 529 into my own net worth since it a) can be used for any of my kids or future kids, and b) I don’t want my kids thinking they’re “owed” this now once they’re old enough to read my blog, haha… But I guess I can’t convince colleges/loan companies to think along the same route ;)
I kind of hate when people ask this. I always turn it around and ask what they want to do with their lives because that’s what they should do with their money. It’s hard to balance a ton of different goals though, and there really isn’t any easy answer on how to do that. You just have to spend some time thinking it over and deciding what matters the most.
My latest “extra” money things –
A new harp – partially financed with the sale of my old one. Also, new strings and next month, probably a carbon fiber reinforced flight case. Fun stuff!
Investing in my husband – The blacksmith forge is still our big project, so we continue to stash money for that. We’ve got a couple more masons to get quotes from and have to wait for the weather to warm up and then it’s go time. We may end up doing some or all of this ourselves, but for now it’s full on super cash stash!
Retirement – Now that I have a mortgage and property taxes, I can adjust my tax withholding. I shoved that extra money right into my 401k!
Upcoming “extra” money stuff –
5 year anniversary vacation
Fix our plumbing and driveway
Stash money for a rental property
Actually, it looks like I’ve got a pretty nice balance going here. I’ve got long term, short term, and a want on both lists. I might have to keep that going!
Harps and blacksmiths??? You don’t hear about those every day, haha…
Awesome :)
Also, agree with this 100%: ” always turn it around and ask what they want to do with their lives because that’s what they should do with their money. “
Oh how I wish I’d have more money coming in than coming out. Unfortunately it is the other way around most of the time. But during those times that I have extra money, I always set it aside for savings of investment. We always have to prepare for the future rather than spend it unwisely.