What to Do With Your Money

So you are trying to “get ahead” financially and have cut expenses and increased your earnings as much as you can. What are you going to do with this money?
Even if you don’t have much money left over yet, thinking of what these different options can do for you is motivating. After all, why bypass those shoes if all you are going to do with that money is stuff some cash under your mattress?

1 - Emergency fund: This actually is similar to stuffing money under your mattress, but it is essential for your financial health. Think of it as buying yourself comfort and security. If you are over 18 and don’t have at least $1,000 in your checking account, I really urge you to do whatever you can to achieve that mark. After that, I have heard a variety of responses for how many months of expenses you should have as your emergency fund. I aim for about 5 months of my mortgage + utilities + $1,000 for my husband and me to spend per month.

2 - Income producing assets: These are assets that actually create passive income for you. That extra money could then be used for any of these categories. If you keep reinvesting in income producing assets, you can eventually replace the income you make from your job! This is my favorite category, so I made two special posts for it. If you are interested in what assets to buy for Income Creation. If you are interested in how these investments can transition you to a more enjoyable (but less lucrative) career without compromising your financial goals, check out My Dream of Semi-Retirement.

3 - Growth investments: What I mean by this is investments that don’t necessarily give you income, but your return comes from an increase in value. Your payout is realized when you actually sell the stock or whatever your investment was. Within this category, I see 3 categories.

a)       Long-term: Think retirement savings. Be sure to take full advantage of any employer 401(k) matches and get yourself a ROTH IRA.

b)       Mid-term: I consider anything that is not for short-term or retirement to be mid-term. This one is tricky because short of special set-ups for education saving, people really don’t talk about it. However, maybe you are saving for a child’s wedding, plan to make a career transition in the next decade or so or maybe you want to retire prior to 59 ½ or whatever age it is that you have to be before you get penalized for withdrawing your retirement money. What do you do? My plan is to use income producing assets.

c)       Short-term: You are looking at a time span of about 3 years or less. Maybe you know you want to go on a special vacation, adopt a child or you know you’ll need to buy a car soon. You risk has to go way down when you are working with a short time period, so money-market funds, CDs or possibly some of the income producing asset ideas are good places to start.

4 - Expense reducing investments: The concept here is buying something now that will reduce your expenses in the future. Purchasing a fuel efficient vehicle is a great example. Keep in mind though that your payout occurs by looking at the marginal improvement from the investment compared to the marginal cost of the investment. Please leave a comment if I should explain that further.

5 - Debt repayment: Being debt free is a respectable goal, no doubt. I am putting it last because there is already so much hoopla over this. I am a bigger fan of gathering dollars than saving pennies so my decisions are decided by the comparative interest rate as well as a consideration of the risk that having debt causes. If you have high interest credit card debt, pay that crap off for sure! However, you may want to just consider a strategy that involves a mix of saving money (in more than just retirement) and paying off debt rather than assuming that your #1 priority should be becoming debt free. For instance, I think there are opportunities to get a 6% return with little risk, so I’m purposefully NOT putting the money back into my house on which I am paying 3.75% interest. Furthermore, if you have some foreseeable financial needs that are expected to come prior to when you expect to pay off your house, that extra money is not going to help you unless you pay all the fees associated with refinancing for a lower payment. 

Let me know what you think and what you are focusing on right now!