That was an EXCELLENT question I got from a reader recently, and it’s one most of us often wonder about ourselves. And one that usually means we’re doing pretty well too :)
The people asking this question are currently at #3 of the Cash Flow Categories™:
- You’re losing money every month/paycheck
- You’re breaking even every month/paycheck
- You have more money coming in than coming out every month/paycheck!
- You have a RIDICULOUS amount of money coming in vs going out every month.
#1 sucks the most but we’ve all been there at some point in our lives. #2 means you’ve at least got the ship back upright again and now humming along in place. #3 means your ship is finally starting to move forward towards your goals! And #4 means you’ve already crossed the finish line and you’re now in uncharted waters… with much more money on your hands than you know what to do with.
Most people fall into categories #1-#3 :)
But I digress…
Here is the first question I was asked in this reader’s email, followed by my thoughts and answers on a couple other questions as well… hopefully they help you too?
Once all the bills are paid off (not the house, other bills like cars, credit cards, etc.), how do you prioritize what to do with your money?
J$: It depends on my goals at the time, but usually all my “extra” money goes right towards investments unless something super important or scary comes into the picture. Like losing a job or depleting an emergency fund/etc. Provided we have no consumer debt though and a flush e-fund, here’s the order of where our extra money would go. Prioritized to take advantage of all retirement tools at our disposal:
- Put money into 401(k) up to the employer’s match to reap all FREE money! (Or, in my case, SEP Ira since I don’t have a 401k)
- Max out my Roth IRA
- Go back to my 401(k)/SEP Ira and max that out too
- WILD CARD TIME!!
Wild Card time is the best. Similar to #4 in our Cash Flow Group™, this is the spot most of us only dream about. It means that you’ve not only got all this extra cash coming in to the tune of $23,000 (since you’ve just maxed out your 401k @ $17,500 AND your Roth @ $5,500!), but you’ve STILL got plenty more to play with! And you’ve covered the most important part already: Retirement.
With Wild Card, your options are endless. And again depends on your goals/dreams/priorities. Here are a few things Wild Card can mean for you:
- Paying down/off your house!
- Starting a new business
- Buying a new business
- Dabbling in more riskier stocks/investments
- Creating an “F You” fund one day for your job (so you can plan out one of these ;))
- Giving generously to causes you believe in
- Funding your OWN causes you believe in!
- Funding your kid’s/grandkid’s college
- Re-investing in your own education
- Buying J. Money a house to thank him for his help :)
And I bet there’s a good dozen or so more you can add to the list of dreams yourself. It’s an incredible phase to be in, and I’ve been in and out of it myself over the past 6 years (currently out of it due to low biz $$ and popping out babies left and right).
I notice when you post your financials that you keep that small HELOC on your house. What decision process did you use in deciding to keep it rather than pay it off with your liquid assets, and why?
J$: It again comes down to goals and priorities. I’m currently in cash hoarding mode due to the aforementioned babies and biz $$, so it makes us more comfortable knowing we have a pot of money saved up for emergencies/daily expenditures/etc shall we need it. When times were (financially) awesome a year or two ago, I was aggressively paying down that 2nd mortgage every single month and DID consider paying it off in one fowl swoop which many readers may remember. Looking back I’m glad I didn’t, but you can only work with what you’ve got at the time.
So ultimately it was another “what’s our top priority right now?” type deal for us, and presently that’s having enough cash in reserves until things turn around. As much as it would give me a financial orgasm to have that HELOC paid off once and for all! Haha… But it’s now a “business” as a rental property anyways, which changes the game too…
Now that our bills are paid, I am struggling with whether or not I should fund 529’s for the grandkids (I’m going to), make principal reductions on our LARGE second mortgage or on our LARGER first mortgage, increase our investments, pad our liquid savings, or do some very necessary and long neglected home repairs…
J$: That’s a tricky one, mainly because I don’t know much about your situation, nor do I know your long term goals (do you see a pattern here? :)). I’d be willing to bet most financial advisors would probably tell you to pay attention to your OWN situation first, and then if/once you’ve got that locked down nicely go ahead and save/invest for others. Even family, cuz you gotta make sure YOU’RE good first.
But of course being a father now myself, I totally get wanting to provide for our kids/grand kids and it’s usually a more emotional than financially-correct thing :) So, personally, I’d probably do a mixture of everything in your shoes. Maybe put 80% of all “extra” money into your own investments/projects/mortgages, and then siphon away some for the grand kids as well. That way everyone wins. But I’m certainly no expert in the matter…
Just remember this one thing: Everything’s temporary. In both life, and in money. So what you work on now can be completely different in what you work on in 12 months, or even 2 months. So I always suggest taking action in the route that makes the most sense to you right *now*, and then adapting as time goes on. Don’t get trapped in analysis paralysis and drive yourself crazy! All those routes improve your life.
Hope this helps a little… To everyone reading this right now :) It’s a good problem to have!
Cash Flow Categories™ – I made this up. Sounds pretty legit though, right?
[Photo cred: artist in doing nothing]