Sitting on Cash in a Savings Account? Here's Step-By-Step, What to Do with It

Want to listen to this post instead of reading it?

A lot of people seem to think that tax strategy and investing are for, quote unquote, "rich people," whatever "rich" means to any given individual. But the truth is, and I've long said this and firmly believe it, if you don't have a trust fund coming your way at some point in your life, I'd say tax strategy and investing become even more important for you. That's because if you already have $10 million in the bank, let's say you can earn 5% on that for the rest of your life, either in a savings account now or in a more moderate investing account and do quite well, because 5% of $10 million is a lot.

But if you don't have that coming your way, then I would say that investing is even more crucial, and tax strategies even more important because having a few thousand dollars more on your tax bill actually matters a lot more to you than if you have $10 million in the bank. Also, it's more important for you to get in on that investing that gives you a seven to 10% rate of return average every year because you have a lot more need to grow your money, as opposed to someone who already has $10 million in the bank.

The goal is less about growing that money and more about sustaining that money. So the math totally changes. But the way that our system is set up now is the complete opposite. It's like the rich people feel like they have to know all the tax strategy and the investing and the quote, unquote, regulars feel like that stuff is just for the rich people.

But in my opinion, it's the complete opposite.

So, we are going to dive into what to do with cash you might have sitting in your checking account. And when I first started this business so many people told me that they’re sitting on $100k+ of cash and didn’t know what to do with it. I know that are probably going to be a number of people tuning into this episode thinking, "Oh my God, she's talking about me." But I just have to say that multiple, multiple, multiple people told me this!

If you're like, "I have a hundred thousand dollars in cash" or whatever the amount is, $50k, $20k, $120k, whatever that number is for you, if you have a lot of cash sitting in either your checking account or savings account, this episode will give you a roadmap. To think about what to do with that money so that you can optimize it. Also, hopefully save you a little bit of money. On your taxes.

Here's the thing about the steps to take. The first few are pretty universal regardless of where you are financially or what else you have going on in your life. And then once we get beyond step three, that's where it begins to be a little bit of choose your own adventure.

So I'm not saying you have to do this and then this, and then this, and then this, and then this, and there's no other way to do it. The first few steps again, I think are pretty universal for everybody. But then after that, I'm going to talk you through some different options that you can do with your money, so that you are best optimizing it.

And of course, if you really aren't sure, or you want to talk through it or you want my advice. For your specific situation, this is where booking either a one-off session with me or my longer-term program, the Run Your Money Roadmap is going to be most helpful so that it can help you figure out what will work best for you. And just remember, as I said, the top of this episode, my time is going to be much more limited starting soon. So, if you are interested in getting on my calendar, I would definitely jump on that sooner rather than later.

And you can go to a product of grant.com forward slash work with me to book your spot.

All right. So you have cash sitting in the bank and you're like, "How much should they keep in cash? Or what should I do with this?" Here we go. Step one. You need to have an emergency fund. So, no matter what, you never want to have $0 in cash because you will come up with emergencies.

I don't even like the name emergency fund. I just use it because everyone knows what that is when I say it. But I don't want you to think of it as an emergency fund because just living life, you are going to come across. Unexpected expenses. Sometimes that expense is going to be quite small.

Sometimes those unexpected expenses are going to be quite large. If it has to do with your car or something, breaking in your house. So you need to have an emergency fund because an emergency fund keeps you out of credit card debt.

If you don't have an emergency fund, then when something does happen. Depending on how much extra money you have in your budget, depending on how big the emergency is. It could send you into credit card debt. While I think debt can be a great way to leverage and grow your money, credit card debt ain't it. It's not the way you want to go because that interest is so, so high. It can be 20% interest or more, which is really, really expensive for debts. Okay, so you want to make sure you have an emergency fund. Now you might be like, "How much of an emergency fund?" Here's what I recommend. You need at least three months of paired-down, living expenses. That's the bare minimum. I think having something like six months is probably better, but it depends on a few things.

One, if you have kids, I think you should have closer to six to 12 months. If you have a house, either you should have six to 12 months as well or have a separate savings account for your house because things will need to be replaced at some point. Whether it's to get repainted or the roof or HVAC or whatever. So either. Six months and a separate account for your house savings account or just 12 months. Now, I don't think you need to have a fully funded 12-month emergency fund in order to move on to the next steps. You need to have probably at least three months fully funded in your emergency fund before moving on. Once you have that, then you can move on to the rest of the steps.

And then out of your budget, you will just add more money into that emergency account until it's fully funded at either that six or 12-month mark, depending on your needs. The other thing that I think will determine how much money you need in that account is the kind of industry that you're in.

For example, my husband is an engineer. He works for the U S mint. So he's pretty job secure. He's not getting fired or laid off anytime soon. So we're not really that worried about him ever being laid off and only relying on my salary or our savings. If on the other hand, you are in an industry that is going through a lot of change.

There has been a lot of layoffs. Then you're going to want something that is closer to that. Six to 12 month mark. so it is going to be very individual, but generally, six months is average. Once you have at least three months in your emergency fund.

And then remember you're going to add a line item to your budget to add money into that account every month until you hit that fully funded amount. Then you want to pay off any high-interest debt, and I would lump some, this, if you have any debt that is more than that, seven to 8% range. If you have a personal loan or a credit card that has very high interest, I would take whatever cash you have in this savings account and just pay off in full your credit card or whatever this loan is.

If you have less than 7%, and especially if it's less than 5%, in my opinion, I would not lump sum it. I would keep paying that minimum payment until you pay it off and that's because your money is going to do better in the stock market invested than it would be to pay off like a three or 4% loan.

Now, this is very scary for some people because whether or not they've explicitly followed the likes of someone like Dave Ramsey. It is very entrenched that debt is bad. If you have debt, then someone else owns you and blah, blah, blah. And here's the thing. If you bought your house before a year and a half or so ago, it's depending on when you're listening to this. You likely have a mortgage that's under 5% and very possibly a mortgage that's under 4% interest, which means that to pay off your mortgage quickly or all at once. It's literally costing you money to do that because you could hold onto your money. And keep it in a savings account.

That's earning you 5% or better yet. Put it into an investment account, earning you seven to 10%. It's just going to cost you more money. I have another episode about paying off debt and how to do the math and also how you feel about it. I'm not going to go too much more into that.

I will put that in the show notes so you can listen to that because I know some people are just like, it's so ingrained to get their mortgage off the books as quickly as possible. And if you really want to do that, as long as you know the math and that it's not the best mathematical decision, then by all means, it's your money.

And you've got to do what works best for you. But if you're listening to this episode, because you want to optimize the cash that you have on hand, that is not the way I recommend. Okay. So you've got this cash. You are preserving at least three months of it into this emergency fund, possibly more. And then if you have any high-interest debt, you're going to take that cash and pay it off.

Find out the rest of the steps by listening to the episode here:

Want free money advice in your inbox every week?

Subscribe to my Run Your Money Newsletter for free money tips and tools to help you run your money better in your relationship, with kids, and more!