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.

Create an Annual Budget

Financial Freedom in 2021! Take Action: Day 4

This step is less intimidating than it sounds, but it does require knowledge of your fixed expenses and your list of priorities with their totals from yesterday’s post. This budget can be in any format that you’re comfortable with: a spreadsheet, an app, a sheet of paper. I prefer the “Personal Budget” template in Microsoft Excel; it’s formatted for a monthly budget but can be altered to enter amounts for annual income and expenses. I’ve also added a column for “Actual” expenses on my spreadsheet, in addition to “Budgeted”, so I can track our exact spending in each category. I’m sure there are *smarter* ways to keep track of everything, but Excel spreadsheets work for me, so I’m sticking with them. All you really need is a format that allows you to list your annual expenses and subtract those from your net income.

When making this list of annual expenses, think of those that are fixed and can be predicted for the year. Some of these expenses include mortgage or rent payments, property tax estimates, home owner’s insurance, car insurance, other insurances, a regular medical expense such as contacts or prescriptions drugs, car payments, annual subscriptions such as Costco or Amazon Prime, and tithing. After recording those fixed expenses, add lines for your priorities, such as an emergency fund, monthly investing, travel plans, and/or a big purchase. I like to include these in our annual budget so that when I’m preparing our monthly budgets, I use what’s leftover to plan our variable spending. I want the fixed expenses and our savings priorities set aside before we even begin our monthly spending on groceries, experiences, gas, clothing, etc.

Below is an example of what an annual budget might look like. The “Cash Balance” remaining is what will be used for monthly budgeting tomorrow.

Identify Savings and Investing Goals

Financial Freedom in 2021! Take Action: Day 3

You’ve set your priorities, but how much money will each require? And how much more must you set aside for emergencies and retirement on top of amounts saved for the fun stuff?

According to the top names in personal finance, setting up an emergency fund is first on the list. What’s that number for you? Research shows that nearly half of Americans would not be able to cover a $400 emergency without using credit cards. Because of this data, many experts recommend having cash saved up and accessible in the amount of 3-6 months of expenses. During these uncertain economic times, many are saying to double that number.

However, in episode #153 of the How To Money Podcast (pre-pandemic), hosts Joel and Matt revealed that $2,467 is the specific number to shoot for according to some economists. Only you can determine what your emergency fund comfort level is. Take into consideration the following personal situations that may have an additional effect on it: family member in declining health, an older vehicle, an unimproved home around 15-20 years old, and/or desire for a career change or business start-up.

Whatever your number is, strive to reach it as quickly as possible. Priorities, goals, and dreams may become distant memories if a financial emergency thwarts your personal progress.

After identifying your target for an emergency fund, decide how much money to set aside for your other top priorities this year. Here’s an example of how to determine what to budget for a specific purpose:

  • Priority: Early Retirement (by age 50)
  • Goal: Contribute $24,000 to investment accounts in addition to 401K investing
  • Deadline: Dec 31, 2021
  • Frequency of Contributions: Max out Roth IRA’s by Feb 28th and then contribute monthly to brokerage account
  • Necessary funds: $6000 in Jan, $6000 in Feb, and then $12,000 from March through Dec ($12,000/10 = $1,000/month)

Take some time today to place a total dollar amount and a deadline next to each of the top priorities you listed yesterday. (If you don’t already have a sufficient emergency fund, you might want to determine an amount that’s comfortable for you and add that to the list.) Prepare to include these totals in an annual budget, and as the month goes on, I’ll share a few ways I was able to increase our family’s savings rate from a negative percentage to about 30%, in addition to what we budget for travel, family traditions, tithing, tuition, and gifting.