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What to Do With Your Extra Cash From Staying at Home
One positive side effect of this period of social distancing is that, over the past two months or so, many people who have found themselves working from home and unable to go out — teachers, computer programmers, professors, accountants, office workers, engineers, managers and many others — have found themselves saving a ton of money. I’ve had several friends express quite a bit of pleasure at the amount of money building up in their checking accounts since they can’t go out and spend it freely.
In the coming months, some aspects of life will begin to return to normal, even as many people continue to choose to socially distance. Many people will adopt a mix of their old routines and their newer ones, and many will be tempted to spend some of that newfound wealth.
Here are some suggestions on how to handle that transition in a way that balances the best of the life you want with the best of the life you have.
Think carefully about what you return to.
Given what you’ve learned about yourself, your routines, and your habits over the last few months, what routines and habits would you return to if everything reopened immediately and things went back to normal?
Would you immediately start living life exactly as you did back in February? Or, if you look back on that life, do you now see some things that were pretty wasteful and didn’t bring you a whole lot of value?
One practical way to do this is to pull out bank statements and credit card statements from January and February and look at how you were actually spending money then. Which of those things really really excite you and you can’t wait to get back to? Which of those things are barely remembered or don’t fill you with much joy?
It’s a great idea to return to the things that really brought you joy, but is it really a good idea to get back to the things that didn’t bring you much of anything?
As you go back to your old routines, intentionally make sure that you’re bringing back the things that brought you joy, but at the same time, intentionally avoid the things that you were spending money and time on that didn’t do much of anything for you.
This process will allow you to move forward with the best of both worlds. You’ll have the things you really value from normalcy, along with a continued positive financial direction with which you can build a great future for yourself.
Use that accumulated money in a smart way that gives you the most options going forward.
So, what do you do with that accumulated money? Given that four in five American households lived paycheck-to-paycheck before COVID-19 emerged, one great step that most Americans can take is to get out of the paycheck-to-paycheck life so that, if they miss a few paychecks, they’re not immediately skipping bills and avoiding creditors and have some time to stabilize.
How does one do that? The steps are pretty straightforward. First, get caught up on all of your bills so that you’re no longer in a cycle of late fees. Next, build an emergency fund of at least a month’s worth of lean living expenses, ideally two or three months. Keep this emergency fund in a savings account at a local bank or credit union, ideally, one you don’t have immediate and constant access to so that you’re not easily tempted to spend it on frivolous things. One good approach is to just open a savings account at a new bank or credit union (you can do that online), set up a small weekly automatic transfer to steadily fill that savings account, and put the ATM card from that bank in a secure place in your home.
If you’re out of the danger zone of paycheck-to-paycheck living, consider eliminating debt. Start by targeting your highest interest debt and use the money you’ve been accumulating to make extra payments against that debt. Make your minimum payments on all other debt, of course, but start knocking away that credit card debt ASAP.
This has a bunch of positive effects. It helps your credit rating going forward. It means less of your money leaves your pocket due to simply repaying interest. Even better, as you start paying off these debts, it means fewer and smaller monthly required bills, which means you can pay off further debts even faster and, eventually, find yourself free of debt with a ton of discretionary income, as the gap between your income and your monthly essential bills will be very wide.
Another approach to consider is to use some of that money for improvements that reduce long term expenses. Perhaps now is the time to consider improvements like solar panels, a geothermal heating system, improved insulation in your home or more energy-efficient windows.
Think carefully about your long-term goals, too.
Another important element to consider is your own long term future. What exactly do you want to achieve in the future? What big expenses do you know are coming in the next few years? What things would you like to achieve in the long run?
For example, this might be a great time to start contributing to a retirement plan or to significantly bump up your contributions to retirement. If you’ve ever felt like you should be contributing more to retirement, right now is just about the best opportunity you’ll ever have to bump up those contributions. If you’ve ever felt like you should start contributing, right now is just about the best opportunity you’ll have to sign up for your workplace retirement program (if you have one) or a Roth IRA (if you don’t; here’s a basic guide to Roth IRAs if you’re unfamiliar).
If you’ve thought about saving for your child’s college education, this might be the right moment to open up a 529 college savings plan for your child. Note that I would only consider doing this if you don’t have any high-interest debts you’re dealing with and you’re already adequately saving for retirement, as those should take higher priority. If you’ve got those things under control, a 529 college savings plan is a great way to set yourself up to really help your child with college expenses or other educational opportunities after high school. Here’s a great guide for 529 college savings plans.
If you know you have some major expenses coming in the next few years, like replacing a car or buying a home, put some of that extra money aside for those goals. Having a down payment on a home can save you a ton of money by helping you secure a better interest rate on a loan and avoiding mortgage insurance. Having a down payment on a car — or, even better, having enough money to buy it outright — helps you avoid higher interest rates on car loans. If you know that you’re going to face a major home repair in the coming months or years, having money on hand to simply pay for it will be incredibly useful.
The money that’s built up in your checking account might prove to be a game-changer for you.
While it might be tempting to use that money for something entertaining or enjoyable, simply utilizing it for something sensible like securing your future and making real progress toward your long-term goals will actually end up making a life changing difference for you and your family.
That saved money could be spent on a splurge, but it could also be the start of a truly new direction in your life. The choice, in the end, is up to you.