Legit Financial Cents: So You’re Running a Surplus

You’re better off than half of America

It’s the end of the month. You’ve gotten your second and final paycheck for the previous 30 days of hard work. Your other income has found its way to your bank account. Some how, by the grace of god, the amount taken from your bank account to keep your credit overlords happy AND allow you and your family to eat has not depleted your entire wad.

You are in an enviable position. Savor it for a moment. You’ve made it; you have disposable income!

So what do you do with these excess Tubmans, the new members of your asset family?

Start an Emergency/Rainy Day Fund

Life happens, and it happens fast. Every day, someone is looking to pull a fast one and fleece you for as much of your hard earned cash as they can. This applies to the street level panhandler, all the way up to the big pharmaceutical companies that will price gouge you for epipen or only allow your dear sweet Grammy her heart medicine if you pay the $5,000 per treatment up front in unmarked bills.

If a situation like this comes up and you need to pay fast, you will either have to have your own money accessible, or you will have to borrow it…and borrowing it will not be free.

Putting those excess dollars in a safe, easily accessible spot to be used for an emergency will give you the piece of mind you need to bring your stress back down to prehypertension levels.

Leaving the money in a checking or savings account with your local credit union (or bank if you must) is probably the safest route. These accounts are generally insured by a government agency, the FDIC. Even though this route is relatively safe, it still would require a solvent credit union/bank, a functioning economy and political will to keep these guarantees in place. The checking account should give you unrestricted access to your funds (and probably won’t pay much interest, if any) while the savings account may have restrictions on how many times you can transfer money to other accounts (but will pay a token interest payment for you allowing them to lend your money to others).

You could always keep the funds at home, in a safety deposit box, or bury it on a deserted island. People will say this is risky because you can’t keep an eye on it all the time, and because your money will erode due to something called inflation. In the current economy, inflation is very low, so this risk isn’t as big a deal when goods and services increased in cost 3% a year and banks were paying similar rates for keeping your money in their savings accounts.

Invest it

If you succumb to the fear of inflation and need to seek out higher returns by making your money work for you, there are a number of non-savings account type vehicles. Just remember, the more you get paid in interest, the more likely you are to lose the principal amount you saved. It will also be harder to access this money in a timely fashion.

Different investment vehicles include:

  • Exchange traded funds & mutual funds
  • Stocks
  • Bonds
  • Money market funds
  • Certificates of Deposits (CDs)
  • Derivatives
  • Real estate
  • Buying partnership in a small business

We will discuss many of these options in future articles, but long story short, it’s best to expose yourself to a basket of these different investments. As the old saying goes, “don’t put all your eggs in one basket”.

Paying off existing debt

Instead of risking the amount of money you have to invest, in a chase of higher returns, another strategy is to use your excess funds to pay off existing debt.

The existing debt you have probably came with a borrowing cost. Each payment you make will have a portion that goes to the lender as a fee for them letting you borrow money, with the rest going to reduce the amount you owe that lender. Sometimes this fee can be as high as 30% on outstanding balances you owe.

Instead of looking for 8% returns in the stock market (🙄) and risk losing what you put in, paying off high interest credit card debt is a sure fire way to effectively “earn” the interest rate you were paying the overlords. These savings you are creating by not having to pay the interest fee next month are your “returns”. If you pay off the outstanding balance you owe to the lender, you then lower your outflow payments and boost your disposable income for the next month (unless you load up the credit card with debt again).

You should stick to this strategy with high interest credit cards where you can free up additional credit to be deployed at a later date. It is not as useful to pay off low interest, fixed installment debt (auto loans, school loans), as you can not utilize these credit lines again in the event of an emergency.

For more on investing and debt, I recommend these books to get you up to speed:

The Compound Effect

Investing For Beginners (Introduction to Investing)

A Beginner’s Guide to Investing: How to Grow Your Money the Smart and Easy Way

The Intelligent Investor: The Definitive Book on Value Investing