Too Much Cash: A Good Problem to Have

The pandemic of 2020 has had many unexpected effects on everyone’s finances. One way or another, I’m guessing your financial life has changed since March of 2020.

Unfortunately, many people lost their jobs, their businesses, and their ability to pay their rent or mortgages. It’s been devastating to hear these stories. Thankfully, there’s been relief over the last year in the form of higher and extended unemployment benefits, moratoriums on evictions and foreclosures, stimulus money from the government in the mail, and help from several charitable organizations. I know there are many people still struggling, for whom I pray and have added more in our personal giving budget to go toward.

For many others, though, this past year has allowed them to reassess their spending habits and make major changes toward saving. It’s allowed many to sell their homes for significant profits and/or finance a home with unprecedented low interest rates. Additionally, after its initial fall, the stock market has left many people with realized gains far beyond what they’d imagined.

Because of these significant changes in 2020 that have carried over into 2021, many Americans are finding themselves with a really good problem to have: too much cash and what to do with all of it. Most personal finance experts believe that keeping extra cash under your mattress or sitting in a simple checking/savings account for a long period of time is equivalent to losing on an investment or burning a percentage of that cash in your fire place.

Due to inflation, your dollars today will be worth significantly less than in the future … and I’m not talking about the distant future. According to the rule of 72, at an average 3% rate of inflation, your cash today will be worth HALF its value in 24 years (72/3 = 24). So, if that money you have lying around isn’t making you more money (at a rate greater than inflation), it’s essentially making you less money. Therefore, you need a plan for that cash.

If you’ve unexpectedly found yourself in this position of holding onto money in excess of your emergency fund (or specifically saving for a large purchase), it’s time to figure out where to put it. My husband and I are in this boat with you, so I’ve done a bit of research to determine our best options for what to do with that surplus in the bank account…

Invest in Index Funds

We have seen over 20% returns in the past couple years on our VTSAX (Vanguard index fund) investment. In addition to our monthly contributions, we often invest our family budget surpluses in this index fund through our joint brokerage account (after our ROTH IRAs have been maxed out). This might be the easiest way to invest, and it’s truly passive. But we still have a large cash cushion that we haven’t dumped into an index fund because we’d prefer to diversify and …

Buy Real Estate

I’m not going to lie to you. Buying real estate in this hot 2021 market is TOUGH. We’ve lost out on 5 deals in one town over the past 3 months. However, we’re determined to keep trying, so we have a significant amount of cash set aside to meet our goal of closing on 3 doors this year. Now that we’re already nearing the end of the first quarter of this year and entering the really busy real estate season, though, we recognize that 3 doors might be a pipe dream. So, maybe we can remain involved in real estate if we …

Become a Hard Money Lender

A return of 7-12% sounds pretty promising. This is what most private money lenders charge investors for doing a financing deal without using a bank or typical lender. The hard/private money lender is responsible for vetting the investor he/she is lending to, doing the underwriting, setting the terms of the contract, providing a large lump sum, and chasing the money if it’s not all paid according to contracted terms. So, although private money lending is considered passive income, it still requires quite a bit of work upfront and the possibility of following up afterward if terms are not met. This option still sounds good to us, and we may move forward with the steps to get started soon, but we’ve also thought that another way to diversify our portfolio might be to…

Back a Business

We know of several businesses who have struggled during the 2020 shut-downs, but the ones that have stayed afloat have incredible ideas for reaching more customers and expanding their online presence. They have the plans, infrastructure, staff, and products, but they may not have the funding. With a loan from a local independent investor, like ourselves, they can hit the ground running and pay a contractually-agreed-upon return on our investment when their business plan pans out. This may be one of the riskier ways to invest our cash surplus, so we’ve also considered that we could …

Turn a Fun Purchase into an Income-Producing Asset

Our family often talks about owning an RV for extended road trips or a temporary homeschooling adventure. However, we will not make a large purchase like this without a plan to rent it out when we’re not using it. We could either park the RV on land and rent it out via Air BnB or we could offer our super cool ride to friends and friends of friends at a reasonable rate so they could experience their own road tripping adventures.

Here are a few other ideas to turn a personal purchase into an investment:

  • If you’re buying a heavy-duty truck for work, hunting, or family use, consider renting it out to others to haul items or complete their own home projects.
  • If you’re buying a cool woodworking tool to build furniture or make unique decor as a hobby, consider offering the tool up for a fee to people nearby to prepare for their own projects. (Or sell extras of your creations.)
  • If you’re buying a fancy snow cone or cotton candy maker for a party, use it in the future to sell goodies at local festivals or near the neighborhood pool (with a permit).
  • If you’ve decided to splurge on a commercial-grade carpet cleaner after too many pet and toddler accidents, rent it out to neighbors for a lower fee than what the stores charge. Make your own non-toxic cleaners to go with it as well.

(For each of these ideas, check with your insurance agent regarding coverage/liability before renting out your assets.)

Sometimes, the idea of someone else using an item that’s special can leave us a little unsure, so another option is to …

Invest in Self-Growth

A great way to spend extra cash is to develop more skills that allow for greater income potential in the future. This might include going back to school, taking unique online adult courses, or paying a mentor to teach how to advance in a specific career. These are exciting options and definitely worthwhile if you know you’ll put the skills learned to use right away. My husband and I would love to learn more about renovating an historic home and doing a remodel mostly ourselves. However, we’re quite overwhelmed with raising four kids and keeping up with our current schedules, so this may not be our best choice currently.

There is one investment option, though, that we’ve both agreed is the best for personal growth, community improvement, and living out truths we take seriously, which is to…

Give Generously

I recently heard an amazing sermon by Mike Todd of Transformation Church. He speaks eloquently and passionately about being a purpose-chaser rather than a paper(money)-chaser. He said in his sermon, “God doesn’t have a problem with paper; he just wants priority!“ Our opportunities, finances, and blessings are the fruit after we’ve given His purposes priority.

Most believe that it’s better to give than to receive, and many also believe that true rewards (whether they be money or something even more valuable) only come after you’ve given from your heart. Therefore, this may be the best use of a cash surplus.

There are dozens of other ways to invest your extra cash, and because personal finance is truly personal, each person will likely have a different idea that resonates with him/her. The main thing to remember, though, is that while it’s a huge accomplishment to have saved a large sum of money, you don’t want it sitting around losing value for too long. Every dollar needs a job, and hopefully your surplus can provide more value to you in the future.

9 Easy Steps to Buying an Index Fund

I’ve been asked several times, “How do I get started in investing?” Usually, my response includes several follow-up questions, such as, “What are your investing goals? What’s your risk tolerance? How much money do you have to invest? Have you started first with your employer’s 401K? Do you have debt? An emergency fund?” and so on. There can be dozens of factors to consider.

Then, I recently came to realize that many of my friends were simply asking how to take the steps to open an investment account and contribute to it. Most had already decided that they wanted to invest a certain amount in the stock market but didn’t know how to actually start a new account (outside of 401K investing). Hopefully, the 9 steps below can be helpful to those who are looking for a literal answer to that initial question.

The guide in this post is specific to opening a Vanguard account because it’s the brokerage firm we use, but the process is likely the same or similar for other firms/banks.

Why do we choose Vanguard? We consider it to be the leader in low-cost index fund investing. After all, John Bogle, the founder of Vanguard, was also the inventor of index funds. Vanguard makes investing easy and has several options for mutual and index fund investing. If you’re more interested in trading stocks, options, and ETFs than taking the simple path to wealth, those trades are commission-free. Vanguard also has great customer service, including agents who will answer even the most amateurish questions and will gladly walk you through every step if you get stuck while navigating the website. For all of these reasons, my husband and I have both our ROTH IRA’s, as well as a joint brokerage account, with Vanguard.

Other highly-recommended brokers include Charles Schwabb and Fidelity, which also carry a wide variety of funds and low fees for many of them. (We have investment accounts in both of these brokerages and a few others due to past employer offerings, but we are slowly transferring balances on accounts with higher fees to Vanguard. We’d like to consolidate and reduce fees as much as possible.)

If you’re ready to purchase index funds, here’s your guide on how to do it in 9 steps or less:

1. Have your bank account info available, including routing number.

2. Go to Vanguard.com and select the Personal Investors page.

3. Click on “Open an Account”, then select “Start Your New Account”.

4. Follow the prompts and answer the questions on subsequent pages.

5. Determine the type of account(s) you want to open based on tax advantages, income limits, and contribution maximums.

  • The max contribution for an IRA each year is $6,000 for under age 50 & $7,000 for over age 50.
  • Simple rule of thumb: Traditional IRA‘s give you a tax deduction now, but you will pay taxes on the withdrawals in retirement. ROTH IRA‘s require contributions from earned income and do not give you a tax deduction now. But they allow your money to grow tax-free and allow you to withdraw the earnings tax-free in retirement. Also, you can withdraw ROTH IRA contributions (not earnings) before age 59 1/2 after owning the account for 5 years. (So, if you contribute the max for 5 years, you can withdraw the $30,000 penalty-free as soon as that 5 years ends, but you can keep your interest earnings in the account.)
  • Brokerage Accounts, also called Taxable Accounts, General Investing Accounts, or Non-Retirement Accounts, have no contribution maximums, no income limitations, and also no tax benefits on the interest you earn or the sale of funds. You are subject to taxes on all of it the year you receive the money. These can be joint or solely owned.
  • The other available options are investment accounts for children or small business owners. More on those in a later post.
Types of investment accounts

6. Provide personal and banking info.

7. Complete required paperwork and send it in.

This may take several days for a response.

8. IMPORTANT: When you receive confirmation of funding via email, go back into your Vanguard account to select funds to invest in.

Index funds are recommended very often in the Financial Independence Community. VTSAX is one of the most common ones and allows you to be invested in ALL 500 companies of the S&P 500. Read more about index funds here. Index funds track almost identically over time, so don’t stress too much about which one you choose.

Keep in mind that an index fund is a 100% stock investment. If you’d like to limit your risk a bit and balance out your portfolio, you can invest in a bond index as well, which pays monthly dividends. (We reinvest ours.) Many investors believe that the closer you are to retirement age, the higher percentage of bonds you should hold in your portfolio to minimize risk. (Reminder – lower risk usually means lower return.)

If you’re still not sure how your investment portfolio should be balanced, Vanguard can walk you through a risk assessment quiz to determine asset allocation for your target portfolio before you choose your investment funds. You can also view how different portfolios have performed over the last 94 years.

9. Buy!

Follow the prompts to buy the funds you’ve decided to invest in. You’ll select the desired fund(s), choose the dollar amount you want to invest, and designate where you want the money to come from (likely the bank account you uploaded).

If, at any point, you’re stuck or not sure what step to take next, open a live chat with an agent, read FAQ’S in the margin, or call Vanguard customer service.

Voila! You’re invested in the stock market! Hopefully you’ll watch your money work for you! My husband and I have seen 30%+ returns in the last couple years. These gains are unusual as we’re still in a bull market. Fluctuations are to be expected, but because we plan to keep our money in these funds for over 10 years, we feel good about riding the waves.

For a more in-depth guide to getting started with Vanguard, go here.

Everything written in this blog is based on personal experience. It is not professional advice and should not be taken as such. Personal finance is personal, and decisions should be made based on analysis of individual situations, as well as risk tolerance and financial position. 

Cover Your Ass-ets: Choose the Right Insurance Coverage

Financial Freedom in 2021! Take Action: Day 22

Let’s talk insurance. No one wants to pay for it, but no one wants to live without it either. All the hard work we’ve put into planning ahead for the betterment of our family could be completely wiped out with one disaster, diagnosis, disability, or death. This is why having an emergency fund as well as the right amount and right types of insurance are so important.

Life Insurance

Choosing the right type and amount of life insurance can be very tricky. Those who sell it have gotten creative in marketing the different types, not only as insurance but also as an investment. I prefer to look at insurance for what it actually is: protection of my assets. It is separate from my investments.

When doing an assessment of life insurance, a good question to ask is, “If I die, will a loved one need my income replaced to be able to survive or will a loved one need to pay another to take on my familial duties?” If you are a working parent or spouse, and your family depends on your income, life insurance is a must. If you are a stay at home parent, and your family depends on the work that you do at home, then life insurance is also a must. (The working parent would need to pay a caregiver to take on your responsibilities.)

I’ve heard that a good rule of thumb for deciding on the amount of life insurance to buy is to double your annual expenses, and then add a -0-. So, if you’re able to live on $50,000/year, double that and add a -0-. That would equate to a $1,000,000 policy.

Life insurance plans offered by employers may not provide enough coverage for your family. It is likely that a supplemental plan will be required to reach the benefit amounts mentioned above.

There are also many other considerations regarding which type of life insurance is the best choice. When in doubt, many personal finance experts recommend sticking with term insurance. Keep in mind that you only need to carry life insurance until you no longer have people dependent on your income and/or until you’ve reached a level of wealth allowing you to self-insure.

With all this being said, we know that any dollar amount will not take away the extreme emotional loss of a family member. Life insurance can also allow for some peace of mind and money for grief support during such a devastating time for a family.

Health Insurance

It’s outrageous, I know! We spend $15,800 per year on premiums to cover our family… and that’s on a high deductible group healthcare plan. If we had chosen the lower deductible plan, we’d be out an additional $2,000. We’re covered through my husband’s employer, but what we pay on premiums each month is nearly what I net from my part time job. But because our family’s health is an incredible asset, we pay to protect it.

I’d prefer to pay a lot less to protect this asset, but we haven’t found a way to qualify for less costly options. If anyone has any advice in this area, I’m all ears!

However, if you meet certain income qualifications, there are great options on the health insurance marketplace (healthcare.gov). Unfortunately, open enrollment has closed for the year, but if you have experienced a life-changing event, such as marriage, having a baby, or losing your job, you can still purchase a plan, hopefully with significant discounts.I am probably not the best person to be offering advice in this area because we spend an arm and a leg on this type of insurance, but I do believe that keeping an up-to-date health profile on your family can help you determine which plan is the best choice for you. If you rarely go to the doctor and each family member has good health overall, you can opt for the higher deductible plan and save a few thousand dollars per year. My husband and I have to reassess each year which plan might be best due to the health issues our family is currently facing. A couple years ago, we calculated that we spent well over $23,000 on premiums and medical care due to a baby with asthma and a new Crohn’s diagnosis for our eldest child. Thankfully, we have been able to get both conditions under control, so we are able to go back to the less expensive, higher deductible plan. So, be sure to review the options offered by your employer each year rather than just renewing what you’ve always had.

One more tip – be sure to look into whether you’re eligible for an HSA. This is one of the best ways that you can get a little bit further ahead in investing for retirement.

Disability Insurance

As mentioned in the post, Take Action: Day 1, your ability to earn an income is one of your greatest assets, and you buy insurance protects assets. Therefore, it would make sense to cover yourself in case of disability.

According to statistics, you have a 1 in 4 chance of becoming disabled during your working career. Employer benefits usually only pay 40-60% of salary, on which you still have to pay taxes and high insurance premiums. These policies are often short-term, meaning that you’d have to apply for government assistance after that term ends, and Social Security disability claims often take years to process and to be awarded. (Minimum time is 3 months for processing claim and then many end up in court.)

Many people choose to supplement their company disability coverage with another plan to cover at least half of their annual income (or the amount NOT covered by the company plan benefit).

Homeowner’s/Renter’s Insurance

Here we are with another asset that needs protection: your home and/or rental property. Thankfully, you can really shop around to find discounts and opt for higher deductible plans to lower your premiums. I’d recommend using a broker who can shop around for you.

Car Insurance

Again, you can find a broker to shop around for you and get you the maximum discounts. Consider a higher deductible, less comprehensive coverage for older vehicles, and reduced rates for safe driver record, career/company affiliations, and bundled insurance packages.

Umbrella Insurance

This is pretty much insurance for your insurance. Yep, that’s a thing. Also called Liability Insurance, it’s a relatively affordable way to protect you from the “extras” that your insurance policy may not cover, including lawsuits for additional damages.

This list of types of insurance includes all of the ones highly recommended. There are many other types not mentioned here that may protect some of your personal or professional assets.

However, some insurance options I tend to steer clear of are:

  • Rental Car Coverage: My own car insurance and travel credit cards have sufficient coverage.
  • Mortgage Life Insurance: This is life insurance for the purposes of paying off your mortgage if you die. Instead of paying for a rider or additional policy, just make sure you have adequate life insurance coverage as mentioned above.
  • Identity Theft Insurance: Keep tabs on your accounts and set security alerts for each of your cards and accounts to protect yourself without buying an insurance policy.
  • Credit Card Payment Protection: Your disability or life insurance policies should help to cover credit card payments in case of an emergency. Also, don’t forget that emergency fund you’ve had saved up.
  • Long-Term Care: This one is a toughie! I’m currently of the mindset that my husband and I will be able to self-insure for future long-term care (think assisted living or nursing home), but I have been debating buying a policy for my father. Long-term care insurance is often recommended for people who have too much money to qualify for Medicaid (which is only used toward nursing home care) yet not enough money to pay all expenses out of pocket. And the expenses are HIGH! I’m honestly still on the fence about what to do, but for now, we’re considering other investment options to accumulate cash toward long-term care if/when it becomes necessary.
  • Travel Insurance: With the current liberal cancellation policies for airfare and hotel stays, it’s not necessary. When cancellation policies are a bit stricter, I take each trip case by case. More expensive travel or further-away destinations sometimes warrant a travel insurance policy, especially when kids are involved. The risk of illness goes up when traveling with a large family.

Today’s action step is to review your insurance plans and policies. Consider whether you really need each policy you have or if you need to add more. Determine whether you have adequate coverage based on your family’s financial situation. Then, shop around for the best rates

Set your Priorities

Financial Freedom in 2021! Take Action: Day 2

There are about 20,000 ways to set goals and about twice as many books, websites, worksheets, webinars, and videos to teach you how to do this the “right” way. Goal-setting can feel overwhelming, and figuring out how to start can be a deterrent to starting at all. Instead, I try to identify my top *priorities* first. I find it helpful to make a short list and a vision board of what’s most important to our family before thinking through budgeting, saving, investing, or goal-setting.

For us, those priorities are (in no particular order):

  • Travel (hoping to see all 50 states before first child graduates)
  • Family Traditions
  • Tithing/Giving
  • Saving 25% of income for early retirement
  • Real Estate investing (2 doors/year)

Other priorities that might make your list include: Career Advancement or Change, International Travel, Marathon Race(s), Visiting Out-of-Town Family, Ministry or Mission Work, Retirement this Year, Climb a Mountain, Vacation Home, Pay Off Debt, or Start a Side Hustle/New Business.

For today, make your family’s specific list. Write these down in a journal or under the net worth number you calculated yesterday. Once big priorities are set, it becomes much easier to set incremental, measurable goals. These priorities will also become key in establishing your annual budget. More on that tomorrow…