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The Savings Balancing Act: what to do with extra cash

The Savings Balancing Act: what to do with extra cash

August 17, 2020

I have reached a point in my financial journey where I am starting to get to make decisions on where to put excess cash flow. I have paid off all my high interest debt, and I have some extra cash flow coming in that needs to be put somewhere so I don’t spend it (yes, financial advisors have those temptations too!). Do I add more to my savings cushion? Do I contribute more to my retirement accounts? Do I put more in to my son’s 529 account?  You may be asking yourself these questions too. In my experience as a financial advisor, I have found that in order to come to some decisions, we sometimes have to dig a little deeper.

Prioritizing Your Dreams

The first BIG question is - what are your dreams? Have you taken the time to really think about your dreams and prioritize them? For example, maybe you or your spouse have a dream to retire early. Maybe you want to pay for ALL of your kid’s or grandkid’s education. Maybe you have a big purchase you want to make between now and retirement (dream house, vacation property, RV, etc.). Or maybe all three! At the end of the day, we need to sit down and decide what our dreams are, prioritize them, and start making decisions on what needs to happen to achieve them.

Turning Your Dreams into Goals

Once you know what your dreams are, you are in a better position to turn those dreams into goals. In order to achieve these goals, there are some things to take into consideration. The first big one is how much these different things will cost. Funding 20 years of retirement is likely going to cost more than paying for four years of college or buying your dream RV. Paying for 4 years of in-state tuition will likely be less expensive than paying for four years out-of-state tuition. Figuring out exactly how much each of these different goals is going to cost can help you make projections and figure out how to prioritize them.

Taking Time into Consideration

Another thing to take into consideration is how much time you have to save for your goals. If you are planning to pay for your kid’s education and they are 14, the amount you need to save each month is drastically higher than if you are starting to save as soon as they are born. Saving for retirement is no different. If you are 55 and have not saved much for retirement but want to retire at 60, there is a lot of work to do in a short amount of time. As I am sure you know, the earlier you start saving for your goals, the more likely you are to succeed in achieving your goals.

Saving For Your Goals

You have defined your dreams and turned them into goals. You know about how much they will cost and how long you have to save for them. Now you can start looking at how exactly to save for them. For retirement, you have plenty of options. You can take advantage of your company’s 401(K)/retirement plan. You can open an IRA or Roth IRA if you qualify. You can even open a non-retirement investment account that can be used for retirement or other savings goals. If you want to save for college, you have options as well. A popular option is a 529 account, but there are other options out there like a UTMA/UGMA account or a basic investment account as well. If you are saving for a big purchase that is a little nearer term, maybe you utilize a high-yield savings account or CD to get a little bit of interest without exposing the money to market risks. There may be some tax advantages based on the types of accounts you open up and as always, you should consider how your investments line up with your risk tolerance and your timeline.

Making Your Dollars Match Your Dreams

Once you have determined how you will save for these goals, you can decide how to allocate that extra cash flow. The nice thing is that it does not have to be one goal or the other. You can look at your cash flow and put a portion towards each of your goals. At the end of the day, the real work is taking the time to think, dream, and decide how you want your future to look. From that place, you can do your best to help make your dollars match up to your dreams. Contact your Compass Financial Services Advisor to get started today!


The opinions voiced in this material are for general information only and are not intended to provide specific advice or recommendations for any individual. Contributions to a traditional IRA may be tax deductible in the contribution year, with current income tax due at withdrawal.  Withdrawals prior to age 59 ½ may result in a 10% IRS penalty tax in addition to current income tax. A Roth IRA offers tax deferral on any earnings in the account. Qualified withdrawals of earnings from the account are tax-free. Withdrawals of earnings prior to age 59 ½ or prior to the account being opened for 5 years, whichever is later, may result in a 10% IRS penalty tax. Limitations and restrictions may apply. Prior to investing in a 529 Plan investors should consider whether the investor's or designated beneficiary's home state offers any state tax or other state benefits such as financial aid, scholarship funds, and protection from creditors that are only available for investments in such state's qualified tuition program. Withdrawals used for qualified expenses are federally tax free. Tax treatment at the state level may vary. Please consult with your tax advisor before investing. CDs are FDIC Insured to specific limits and offer a fixed rate of return if held to maturity.