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- If you’re earning more than you need to cover your bills, congratulations! You can use that cash to build wealth for the long term.
- I recommend directing extra cash to any tax-advantaged accounts offered by your employer, or making additional payments on any debts you owe.
- You could also use your extra cash to invest in your personal or professional development — additional training pays dividends in the long term.
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If we’re lucky, there comes a point in our lives when we don’t have an immediate need for every dollar we earn. Some think of that as “extra” money, though I think it is important to point out that there is no such thing as extra money. Every dollar we earn serves some purpose in our lives – even the ones we donate to others in need. However, it is fair to say that as our incomes rise and expenses stay the same, each additional dollar earned becomes tougher and tougher to find an immediate use for.
One way to help solve this conundrum of “too much cash” is to consider your financial priorities. Then, list them out. And, finally, rank them. Once you have that list of what matters the most, it becomes easier to decide what to do with any excess cash.
Any cash that is creating a larger-than-usual or larger-than-necessary balance in your main checking account should likely be repurposed on an ongoing basis. For instance, if you’ve developed a cash pile larger than your emergency fund needs to be and one of your financial priorities is to pay off your student loans, consider increasing your monthly payments to your student loans instead of letting those funds build up in your checking account.
Whether you have found yourself holding a large pile of cash due to a windfall or by building it up over time, here are three things you could do with excess cash to make a larger impact than simply holding it in a checking or savings account.
Maximize contributions to the plans offered by your employer
Many employers allow non-deductible or after-tax contributions in the company retirement plan. These are contributions that should only be considered once you have exhausted the allowable annual limits. Non-deductible (sometimes referred to as “after-tax”) 401(k) contributions can be automatically converted to the Roth portion of the 401(k) plan and later rolled over to a Roth IRA once you’ve either retired or changed jobs. Each company’s 401(k) plan allows something different, so you have to read the summary plan description to find out what your limitations are.
Health Savings Accounts (HSAs) allow individuals and couples to contribute $3,500 and $7,000 respectively each year toward healthcare costs. Funds in these accounts may be used to cover healthcare costs either now or in retirement. The IRS also allows a catchup contribution of $1,000 to those over 55 years old. Many employers even offer a matching contribution to encourage employees to save into these plans.
If your company is publicly traded and offers the option to purchase shares of company stock through an employee stock purchase plan (ESPP), it is worth considering. ESPPs typically offer a 15% discount on all shares purchased, which means that their participants are effectively starting out with a 15% gain in that position.
Make additional principal payments to any outstanding debts
People tend to think only of the stock market or the average percentage yield on their savings account when discussing returns on their money. Rarely does anyone ever look to pay off debt more aggressively to generate a return on their money.
However, paying off debt ahead of schedule allows you a guaranteed rate of return. For instance, if you have an annual interest rate of 5% on a loan and you manage to pay that loan off 12 months ahead of schedule, you have just locked in a return of 5% on your money.
Invest in your personal or professional development
An investment in a public speaking course, a sales skills workshop, or a coding bootcamp could go a long way to boosting your long-term earnings potential. Or it could simply satisfy your intellectual curiosity. And some employers will even agree to reimburse the costs if their employees opt to pursue an executive education program or professional certification related to their field.
Though we can easily point to the dollar cost of an executive education program, it can be tough to quantify the compounding effects of obtaining an advanced degree or professional certification on one’s lifetime earnings potential. And whether you decide to stay with your current employer or test the open market to see what your new skills are worth, it is safe to say that the time and money invested in professional certifications often immediately result in increased income.
Malcolm Ethridge, CFP, CRPC, is an executive vice president and fiduciary financial adviser with CIC Wealth Management.
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