You Work Hard for Your Money. Don't Waste It
You work hard for the money you earn. It would be a shame not to spend a little time to assure you use it intentionally.
Don’t Let Good Money Go to Waste
Once you’ve learned to save it’s important you learn how to use your savings wisely. Not spending it is only half the battle. Deploying your savings wisely puts it to work so you can move towards the goals you've set. You work hard for it, make sure it works hard for you.
Idle money sitting in your checking or savings account can be a wasted asset. Over time, it actually loses value as inflation eats away at its spending power. An even bigger waste is the opportunity cost of how your savings could be working for you, if you allocated it. I've encountered many who have let significant amount of savings build up and left for years, due to inattention.
Surprisingly, this is one of the most common issues I help clients solve. They realize the value of money and want to make sure they use it efficiently to serve their family or community. The problem is, they get so busy with work and family, they let the money sit in savings doing nothing.
How to Use Extra Income
Recently a friend asked my advice on what he should do with a bonus he was receiving. We were at the gym and although I didn’t know much about his situation, he wanted some advice on how to think about it.
Here is the advice I gave him.
The key is make an intentional decision. If you choose to blow your bonus on a new car or other toy, that’s cool. Just consciously choose to. Don’t do it without thinking it through. Be intentional.
Here is the checklist I use with clients to guide them through allocating excess income or money. Whether they're about to receive a bonus or we’ve identified too much cash sitting in savings, we walk through each step (in order) to make sure there is a home for every dollar. It’s crucial this exercise happens consistently to assure your hard earned assets are focused on helping you achieve the things you care about.
Set aside funds in saving for extraordinary expenses. Look ahead 12 months and total up the extras you’ll have to pay for. There always seems to be extraordinary expenses. Extraordinary income is perfect to cover that upcoming vacation, college tuition or home repair.
Pay off consumer debt. What is consumer debt? Anything but the mortgage. Loan payments suck monthly cash flow. Lower your monthly payments by paying off debt and you’ll increase the extra income you have to save and invest. Plus, when life happens (it always happens), you’ll have extra income to help absorb the shock. What should you pay off first? Stick with Dave Ramsey’s debt snowball approach and tackle the smallest balance first.
Fund your emergency fund. Yeah, I know, talking about the importance of an emergency fund is like a dentist talking about flossing. We all know it’s important, but almost no one does it. Your emergency fund is your financial airbag. When your life rams into a financial emergency, it can stop you from hitting the windshield.
Fully fund your retirement accounts. Again, not something you haven’t heard before. I’m still amazed though how few people maximize this benefit. Start with your 401(k). Once you’ve hit the limit here move on to a ROTH IRA. Extra income (or even a raise at work) is perfect for funding your long-term investments.
Contribute to after-tax investments. This is often forgotten and it can hurt you during retirement. If you only have pre-tax savings via your 401(k) or IRA, you’ll have very little flexibility to draw from assets once you retire. As a result, you’ll have limited flexibility in managing where you draw income from and your tax rate during retirement.
Help your community. You are blessed to be so prosperous. Decide what cause and at what level you can support your community. Whether it's your time or your money, think about how you can make your corner of the world better. I’ll admit, I’ve been weak in this area and am working to correct this.