What Do You Do With Excess Cash?

For me, frugality is a never-ending game of optimization. I’m always looking for ways to either cut costs or get more out of my money. This leads us to do weird things like cancelling the newspaper, cancelling the cable, buying wood stove pellets instead of rabbit litter, and either riding a bike or taking a bus to work. (ed: Self hyper-linking skills are on fleek) The way I’ve forced myself into this position over the years is by promising to always increase our monthly savings as measured in Quicken.

Forced Savings

From the time Marge and I moved in together, our savings plan has basically been this: Force a certain amount of savings per month by using automated investing. Money disappears from our checking account before we even notice it was there, and it escapes to a investment vehicle where it goes to work for us. The investments happen on a weekly basis to maximize dollar-cost averaging.

We started this back in 2006. I arbitrarily picked $1,000 as a savings goal for the month. When it became clear that this was too easy a hurdle, I pushed it up to $1,500 a month. Once we hit that goal for three months in a row, we increased it $100. And we’ve followed that model ever since. The amount of monthly forced savings has increased $100 or more every three months.

Now we are at $4,000 a month. As you can tell, I’ve found this method to be really effective. Every few months, we have to optimize, because the money just isn’t there! The savings must be found.

To be honest, some of this is only short-term savings. Some of the savings are used as a DIY escrow account to pay for our property taxes and home insurance, or if we owe any income taxes at the end of the year. All other expenses flow through the monthly expenses and count against that $4,000 number.

And since months can be lopsided, I sometimes have to push expenses ahead a month or two in Quicken, or push income back, to make that average savings goal appear. Funny math, but you get the picture. Regardless, that monthly savings goal is being forced into savings using automatic investments either through our workplace retirement plans or Vanguard accounts every month. If there is a temporary cash shortfall, I keep $3,000 as a buffer in a savings account.

Then every once in a while, there’s a monkey wrench thrown into the works. We get three paychecks instead of two. A tax refund. Some unexpected income shows up and I’m at a loss of what to do with it. And we are having some of those days again. Oh, joyous days!

Fun Money

It looks like April is going to have excess cash well over our $4,000 forced savings goal. We have rent money rolling in now, and our big rental property expenses are accounted for, so we will have about $1,500 in excess cash “fun money” in April. In May and June, it looks to be even larger amounts since there will be an extra paycheck in each of those months, and possibly a retroactive pay raise. So what should I do with the excess cash?

Retirement Savings: You’d think this would make the most sense. But right now we have our automatic retirement savings set to max out just at the end of the year, and putting more into them now would muck up the math.

Pay Down Debt: There’s less than $3,500 left on our student loans, and though their combined interest rate is only 2.375%, it’s very tempting to just pay them off and be rid of those monthly payments.

Stocks: Not the most tax-advantaged decision, but I like to buy a stock now and again. I actually haven’t purchased any since 2014 (Royal Bank of Canada and Lending Club) so maybe it’s time.

The Wellington “Black Box”: We have some money in a taxable account at Vanguard in the Wellington Fund in what I like to call a “black box.” I always wanted to have a fund that acted purely as an income-producing machine. One that we are never allowed to sell shares of. I can only put more money into it, and receive the dividends that it pays out. I picked the idiosyncratic Wellington for this job. It is one of the oldest mutual funds in the country, is very reliable, is balanced between stocks and bonds, and makes a nice gift of dividends and capital gains show up in our bank account every Christmas. The Wellington balance is only a few thousand dollars. I have to be careful of what I add to it, because I can never take it out again.

Rental Property Savings: Of that $4,000 monthly savings, about $1,400 goes into the money market mutual fund / emergency fund to pay for future expenses. This is the DIY escrow I was talking about.  I would also use this account for a down payment on a hypothetical second rental property. This might be the “smartest” use of the excess cash, since the cash flow generated by the down payment on another rental property is bigger than the return on the other investments.

What I usually do in these situations is divy up the excess cash to serve a few different tasks. Right now I’m thinking of hitting those student loans hard, putting a good amount in rental property savings, and putting some in stocks or Wellington, because those are the most “fun.”

What do you do with excess cash?

6 Comments

  1. Sprinkle it around. I concur with the student loan plan. I know for my wife and I that was the first thing we killed when we got married (I was rebalancing and for us, the student loan money wasn’t deductible (unlike mortgage interest) so it had to go). Now if we get a sizable check it goes into various pots (a little for vacation, some for house maintenance, some against the internal debt we created with the student loan repayment (since it came out of investment accounts the plan was to repay to investment accounts) and some into our respective “allowance”/”fun” accounts).

    • Norm

      April 18, 2016 at 11:26 pm

      That’s how I usually like to do it. Divy it all up. I actually just made the student loan payments. Only $500 left overall. Feels very weird typing that!

  2. I tend to be conservative, so I would pay off the student loan. I realize the return has the potential to be greater when it is saved to pay for future rental properties, but even more than the savings, I would appreciate the added simplicity once the student loan is paid off.

    • Norm

      April 18, 2016 at 7:52 pm

      That’s probably what we’re going to do, Angie. Then they would be completely paid off in two months, and the rest I will split up between rental home/emergency savings and maybe a few stocks for fun. Oh, and a bottle of champagne to celebrate having the loans paid off!

  3. I have a bit of a different strategy. Personally I don’t spend depending on how much income I have in a month or how much is in my checking. This is a good problem to have because I know many people that struggle not to spend every dollar that comes in the door, it’s a mental thing.

    I automate 401k and HSA savings, but nothing else. I have an excel spreadsheet that has all my estimated cash inflows and outflows into my checking account for the next 3 months or so. Therefore every payday I’m able to tell how much cash I need to meet the next month’s expenses, and transfer the rest to Vanguard. I have big swings up and down in expenses (and sometimes income), so automating is quite difficult. Personally I like this hands on approach as well.

    • Norm

      April 18, 2016 at 7:56 pm

      I factor in the big expenses like property taxes, and home and car insurance into the savings part. I only pay those big lump sums out of the “emergency” fund. So part of the $4,000 a month savings figure inevitably goes to pay for those. The rest of our expenses tend to stay pretty predictable.

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