What To Do With Extra Savings
What To Do With Extra Savings
In today's episode, we will be talking about what to do when you have extra savings. We will discuss how to think through the different trade-offs and balancing those with your financial goals, how to approach paying down debt and more.
The problem everyone wants to have - extra savings! We will be discussing what accounts and considerations you should have if you have extra savings.
Here are a few topics we will cover:
- - Ongoing Savings vs Lumpsums
- - Being Retired vs Still Working
- - Emergency Funds
- - Interest Rates
- - 529 Plans
Thanks for tuning in. Questions about today's episode let us know.
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Sit down with Paul and Garrett of Ascend Investment Partners for a bi-weekly conversation about all things financial. Focusing on helping you plan, keep, and grow for a bright future.
Full Transcript:
00;00;06;29 - 00;00;23;23
Garrett & Paul
Hello and welcome to your investment partners with Paul and Garrett, where we talk about all things financial, focusing on helping you plan, keep and grow for a successful future. If you're new to the podcast, welcome. And if you're tuning in again, welcome back and thank you for listening. Hello and welcome to your investment partners with Paul and Garrett.
00;00;24;05 - 00;00;42;24
Garrett & Paul
Today we are talking about what to do when you have extra savings. We discussed how to think through the different trade offs and balancing those with your financial goals, how to approach paying down debt. Use cases of a 529 plan and more. If you have questions about any of the topics discussed today, please reach out either by phone or email.
00;00;43;02 - 00;01;04;03
Garrett & Paul
My name is Garrett Smith and we look forward to having you with us today. Welcome back. Here we go again. Another one of these. Yeah. Awesome. Good. Good to be back. Got the two of us today. We're going to kind of talk about what accounts and what considerations you should have if you have extra savings. I think that's one of the fun conversations to have, because it usually means things are going well.
00;01;04;23 - 00;01;26;25
Garrett & Paul
Yeah, that's a good problem to have for sure. It's the problem we all want to have. So these are kind of dollars that, okay, I've got my basics set aside where, you know, covering the housing cover in the cars. I'm getting my 41k match at work. Now, what do I do? Yeah. So you've probably hit the point in your career where you, you know, you're you're doing a little better.
00;01;26;25 - 00;01;47;26
Garrett & Paul
You're not just getting started. You've learned how to budget. And all of a sudden we're we have just seems like forever for that to happen. But now we have now we have extra we can we can actually make some decisions with what should we do. And I think these dollars don't really show up unless you've done the basics right.
00;01;47;26 - 00;02;10;24
Garrett & Paul
If you're if you're not living below your means, have in your kind of your regular budget, you know, extra savings don't just magically show up. And I think managing those well leads to really the financial difference going forward. If you sit up and pay attention and make sure you get these dollars going to the right places, it starts to kind of pull you out of that paycheck to paycheck mentality.
00;02;11;02 - 00;02;26;11
Garrett & Paul
Sure, if you're not careful, you can I mean, you can spend everything you make. You know, there's no question about that. Well, there's always lifestyle inflation. Sure, you buy a nicer car, you moved to a bigger place. You go on more vacations, which is great. You know, you should live and enjoy your dollars. It just should be deliberate.
00;02;26;11 - 00;02;55;00
Garrett & Paul
You know, we never want to fall back into spending extra dollars. Yeah. And so managing the extra savings is is is really important. So we're going to assume that for the sake of this discussion, you've kind of covered those main basics of your living and still able to eat. You're not just on beans and rice anymore. Maybe got some savings in the fall on K And I think the the first question to always ask yourself is, is this a windfall?
00;02;55;07 - 00;03;15;05
Garrett & Paul
Did I win the lottery? You know, do I kind of get a lump sum here or is this ongoing savings because those should be treated very differently? This is an extra two, three, $500 of a paycheck. It's very different than I got $10,000 because of whatever. Right. And and I think on that, the other consideration is, well, am I retired or I'm still working?
00;03;15;27 - 00;03;31;23
Garrett & Paul
Because retirees treat, you know, extra savings, because sometimes your living expenses go down, the house is paid off, your car is paid off. You're not traveling as much because it's the winter. And also and you're get it. You've got some extra dollars lying around. Right. And so I think the first place to look at really is that emergency fund.
00;03;31;23 - 00;03;53;21
Garrett & Paul
That's where we always start, regardless if things are going well or not. So kind of how do you how do you think through the emergency fund, first and foremost? Well, obviously, the emergency fund is just to make sure that when life happens, there's a there's a bucket to draw on. And, you know, I think the first consideration on emergency fund is how much should I have?
00;03;54;07 - 00;04;24;20
Garrett & Paul
And, you know, you just have to look at your personal situation. If you're a two income family, the amount of your emergency fund probably doesn't need to be as much as if you're one income earner, because, you know, if both spouses are working, may lose their job. At least we still have some income coming in. So, you know, financial professionals will tell you you need anywhere from like three months to to six months if you're you're a single earner.
00;04;25;20 - 00;04;51;06
Garrett & Paul
You know, personally, I have a year because just at some point you just have to say, well, I've got extra here. What should I do? And if you just want to make your situation even more secure, you just, you know, have a little bit more robust emergency fund. And then beyond that, it's probably, you know, it might get a little bit excessive if you get more than about a year 18 months or so, because there's probably other things you should be doing.
00;04;51;06 - 00;05;10;22
Garrett & Paul
So. Yeah. And one advantage we're having now on emergency funds is you can actually get an interest rate. You can actually get a return on on saving those dollars. Before it was one conversation we always had was was really encouraging people to build that emergency fund, even though they were earning 0%, even though it was zero was so frustrating.
00;05;11;05 - 00;05;30;06
Garrett & Paul
It was, you know, just it's that buffer that prevents you from going backwards. That's the first of extra savings really should be what can I do to make sure I don't go backwards? If something were to happen, all four wheels fall off the car. You know, you don't want to be going into debt to replace those. That's what the emergency fund is for.
00;05;31;02 - 00;05;53;19
Garrett & Paul
You know, the those those short term, this was unexpected and can keep you from kind of sliding backwards. And that's where I think cash management, especially right now, is really critical. I think a lot of us end up with some extra savings in our checking and savings account if we're diligent. But those accounts right now still personally aren't paying much.
00;05;53;29 - 00;06;15;03
Garrett & Paul
Well, I just retooled my emergency fund just in the last week, and I noticed that even though interest rates have come up substantially, my credit union, where I have had this emergency fund, is just I looked at and was still only paying me like a half a percent, three quarters of a percent. And I just thought this is this is kind of ridiculous.
00;06;15;03 - 00;06;37;11
Garrett & Paul
And so I made some changes to how that how those funds are deployed. And, you know, now I'm getting over 4% on it. And so, you know, you go from from, you know, a half a percent to 4%, It really, you know, that moves the amount of interest you earn in in a big way, especially when there's, you know, a reasonable amount of money in the account.
00;06;37;11 - 00;06;58;11
Garrett & Paul
You get 50,000 or $100,000 in an emergency. Find it at a half a percent. It's $500 a year. A 4%. It's $4,000 a year. Makes it just makes a huge difference. Right. And that's and and we're not talking about dialing up the risk going, you know, stocks, same risk. Just it's still money market funds, same thing that happens to your bank or credit union.
00;06;58;11 - 00;07;15;09
Garrett & Paul
There's just some that are that's available in other accounts to increase the interest rate that you can get. And so and part of that was just in a short term CD. You know, I didn't I put some of it in a just a money market mutual fund and some of it in in just a CD at the same credit union.
00;07;15;09 - 00;07;36;08
Garrett & Paul
But I got, you know, substantially more interest. So you just have to kind of, you know, and don't be afraid to buy a CD with your emergency fund because the penalties are really quite low. I mean, I'm comfortable for people to put their emergency fund in a in a certificate of deposit. And if there's an event, you go in and say, well, I got to have it.
00;07;36;08 - 00;08;00;07
Garrett & Paul
And, you know, it's a it's a month or two worth of interest. It's not like it's a you know, they're going to throw you in jail for it in early. Right. And they're still you know, you can still get all the insurances on the FDIC insurance. Right. And that's those that's kind of the critical area when it comes to cash, is you want to make sure it's in in a secure location as it can without necessarily being under your mattress.
00;08;00;07 - 00;08;22;19
Garrett & Paul
Yes. Safe and accessible. Yeah. And so then I think that if those start to get nailed down and you make sure you have a robust emergency fund to prevent it, and that number will change continuously throughout your life if you have kids or you change your business structure, that number is always changing. But then I think the next place to look really is to is it's to pay down any expensive debts.
00;08;22;19 - 00;08;41;27
Garrett & Paul
If you have. And and I always kind of just use a rule of thumb of any any interest rate that's higher than kind of your short term interest rates. And so for a while now that's been near zero. But now that it's up around that five, 6%. Okay. Anything over that's probably worth looking about. Let's take an active role in paying down this debt.
00;08;42;01 - 00;09;03;29
Garrett & Paul
Mm hmm. And one thing we always encourage, we always talk about it as kind of the pay off the house account, but it can be pay off the car account. It can be pay off the RV account or or whatever. It's it's an account that's set aside specifically to pay off a higher interest debt. And kind of the idea behind that is to start setting money aside and and then also kind of gauging the time horizon of how long will this take to pay off.
00;09;03;29 - 00;09;23;28
Garrett & Paul
For example, a house is going to be, you know, 15 or 20 years that you'll be working on that versus a car, which should be, you know, under five years. And so that kind of gauges the amount of risk that you can take on that Maybe it stays in those short term investment money market type deals, but you can also start looking at some longer term stock type investments to help gain a larger return.
00;09;23;28 - 00;09;44;19
Garrett & Paul
And then when the account gets to a point where it's what it matches the amount of the debt or maybe a little bit more than it maybe double you say, okay, do I want to go and pay off this debt? And you sell those funds and then and then get the debt taken care of. Yeah. And so the idea there is just to have a kind of have a plan, a debt reduction plan.
00;09;44;19 - 00;10;13;01
Garrett & Paul
And, you know, part of the equation on that is what are what's the interest rate being charged and what can I earn on the other side. And and the other part of the equation is the liquidity. You know, some people will just say, well, I'm just going to make extra payments, which is which is fine. The downside of that is when you when you make a an extra debt payment, say it's on your house, you know, you lose the liquid tity of that extra payment.
00;10;13;02 - 00;10;45;24
Garrett & Paul
In other words, you don't control it any more. You you would have to go back in and refinance or something like that, too, to retrieve those dollars if you needed to deploy them some some other direction. So the idea of a a pay off a debt account is just to have a dedicated savings or investment account so that you can put money in there and you don't lose your liquidity in case something else comes up and you want to do something else with the funds, but also that you have a plan to kind of reduce those debts a little quicker than that than the note designates.
00;10;46;10 - 00;11;14;12
Garrett & Paul
Yeah. And I think the only exception to this is if you have some really high interest debt, say, a credit card. Oh, sure. 20%, you know, those will want to work on just paying those off regularly just to reduce that debt amount versus, say, a long term home. Right. The that the interest rate determines kind of how whether you set it aside to save and invest or we just got to put as many dollars on this loan as we can to reduce the interest cost on it.
00;11;14;18 - 00;11;33;13
Garrett & Paul
And I saw a report recently that credit card debts, interest rates right now or are right around 20%. And if you're paying 20% on a credit card, you've got to do everything in your power to get that thing taken care of. Extra savings or not. And even look at maybe slowing down the for one key savings, just get that credit card paid off.
00;11;33;13 - 00;11;52;00
Garrett & Paul
Yeah. There's no where you can reliably earn that kind of interest. I mean, that's just the. Yeah. You just Yeah. Go ahead and pay that one off. Yeah. As fast, as fast as fast as possible. I think sometimes people get stuck in the cycle of just paying interest only on the credit card. And so the, the debt just continues to accumulate and you just get behind it.
00;11;52;00 - 00;12;13;18
Garrett & Paul
And and so if you're using credit cards in any way, shape or form, we do not want to be carrying a balance right now in any way. I think the next place that I always like to look at that I enjoy is if it's if it's available for you as an HSA, a health savings account, that's a wonderful place to have extra savings to be used for, you know, future health care expenses.
00;12;13;18 - 00;12;31;29
Garrett & Paul
Really, savings should be set aside to to pay for a future expense is really what you're doing your job and deferring the use of it to date. And if you can line it up for a specific reason, that's what kind of ties some of these accounts to that future future spending. So, for example, a HSA with with health care costs.
00;12;32;27 - 00;12;57;01
Garrett & Paul
Yeah, those are kind of interesting because I mean, I've had one for years and I've just kind of use it, you know, But a lot of people put money in and and don't use it. It grows tax deferred. You can invest the money because it kind of, you know, kind of acts like an IRA in that sense. And then when you use the money for medical expenses that you pull it out and it's it's not taxed.
00;12;57;01 - 00;13;21;26
Garrett & Paul
And so there's a lot of interesting rules around HSA plans. And that's a great place to to to put extra money if you have some whether you use it now or reserve it for later, that's kind of a personal choice. But there there's a lot of really interesting rules around the HSA and that's a great place to to, you know, put money because it's a tax deductible contribution.
00;13;21;26 - 00;13;42;05
Garrett & Paul
And you know, what a what a great way to save some taxes and to pay medical bills with pretax dollars. Yeah. And there's kind of some interesting reimbursement rules. And so if you want to go down the road of contributing your HSA, but then you continue to pay health care costs out of pocket and then down the road you're planning on reimbursing yourself.
00;13;42;05 - 00;14;04;07
Garrett & Paul
There's obviously steps you need to go through, but it can be really advantageous from a tax and savings perspective to kind of maximize those dollars. And so your HSA should be part of your strategic overall financial plan if you have one available for you. But that's that's one area you definitely want to get those dollars in there, making it more and more flexible.
00;14;04;07 - 00;14;26;14
Garrett & Paul
It seems like every time they they pass a law to potentially roll those into an IRA down the road as well as use them for health care costs in a tax way. So that's that HSA is is really essential and one with the secure 2.0 going forward is I think another interesting place that we've kind of been is a 529 plan.
00;14;26;14 - 00;14;46;10
Garrett & Paul
We've kind of this they seem to be hit or miss for some people, but with the with the change in the Secure Act of being able to potentially convert those five $29 to a Roth account kind of opens up the door of saying maybe a 529 for very future kids. Education is not a bad place to be putting some savings right now.
00;14;46;10 - 00;15;07;05
Garrett & Paul
Yeah. So 529 is for again, it's another place you can put money. There's no tax deduction for go putting it in there. But it you know, the idea is you put it in for a younger child, let it grow tax deferred for educational expenses. And then when you pull it out, you don't have to pay tax on the growth.
00;15;07;21 - 00;15;30;01
Garrett & Paul
And, you know, the question's always been, well, what if that kid doesn't go to school? You know, and and if it's not used for in the past or if it's not used for school expenses, then there's some, you know, penalties and some taxes for taking it out. And, you know, it just so I don't there's just not a ton of people that use those in the past.
00;15;30;01 - 00;15;50;03
Garrett & Paul
But now with this change in the act where people can, you know, if they don't go to school, then you can convert it to a Roth IRA For them. It really, you know, kind of opens up the idea that, hey, maybe we need to take a little closer look at these 529 plans. There might be something there that that, you know, allows for some flexibility going forward.
00;15;50;11 - 00;16;17;19
Garrett & Paul
Yeah. And I think all these kind of highlight the see the 529 the paying off debts really highlights how specific everybody's financial situation is. You know it's all dependent on age your goals and and we're kind of going through some broad based ideas but but really your plan is specific to you and having a conversation with you I think can open those doors of of knowing which of these places to start with because for most people, you can't do them.
00;16;17;19 - 00;16;33;22
Garrett & Paul
All right? You go through ten different ideas and you won't be able to do them all. Just there's only so many dollars to go around. And so figuring out which is kind of the priority of the dollars of saying, Hey, the HSA for me right now is more of a priority than the 529 for somebody else. It could be very different.
00;16;34;07 - 00;17;02;12
Garrett & Paul
And getting those in the right order, I think is is kind of the the point of this conversation of making sure, okay, let's get A, B, and then C, and just kind of let the dollars waterfall down from one to the other until they're used up. Yeah. Sometimes it's just hard to know what's available. There's just so many little nooks and crannies and things that you can do with what extra money that sometimes it just takes a little help to figure out what's best for your situation.
00;17;02;12 - 00;17;24;24
Garrett & Paul
And yeah, especially if you have, you know, if you're kind of the big part of it drives what your future goals are. Are you a business owner? Are you trying to maximize maybe tax savings? Are you wanting to really set up, you know, future children or grandchildren? That opens up a new range of accounts. And so it's like anything, it's the financial goals, It's your personal goals that should drive all of these decisions.
00;17;25;01 - 00;17;48;17
Garrett & Paul
You shouldn't just be saying, well, I will get the biggest tax benefit here, so I'm going to do that. But that might not necessarily line up with where you want the dollars to go. Right. And I think when you have extra savings, too. So we've been kind of talking about structure. But I think another part of the conversation is what I like to consider complementary investing is just how are you utilizing those dollars from an investment standpoint to make sure you're complementing the rest of your financial plan?
00;17;48;24 - 00;18;09;21
Garrett & Paul
Because usually extra savings means I've got the basis of when I want to retire. Goals already accomplished, right? If if, if the goal is still, hey, I'm trying to save up to retire at 65 and enough dollars aren't going that way, that's probably the first place those dollars are going to go. We're kind of assuming saying, Yeah, the basics of my financial goals are taking care of.
00;18;09;21 - 00;18;45;02
Garrett & Paul
I've kind of hit the major points of this then. Then I think this opens up to maybe dial up the risk in some areas or open up some new investing opportunities, whether it's real estate or private equity or things like that, to say, Hey, we can use these dollars to complement kind of the foundational aspect of our financial plan, you know, and it might help you flesh out your goals a little bit more, you know, instead of, well, retiring at age 65, what I rather, you know, have a bigger HSA account or what I rather, you know, put some money in some something for my grandkids so that, you know, it's just it's just discussion
00;18;45;02 - 00;22;00;13
Garrett & Paul
and analyzing all.
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