Lately, we have been hearing more and more positive financial updates from clients who find themselves with extra cash on hand. In some cases, their growing bank account is attributable to the lack of discretionary spending many of us experienced during the pandemic. Another common instance is small businesses who have surprisingly found that business is booming, and our business-owner clients are seeing record profitability. For still other clients with excess reserves, perhaps it was from a real estate sale or an inheritance.
There are countless personal circumstances out there, but the reality is that we have had many clients finding themselves in a more comfortable financial position, who are now wondering what their best options are for that extra cash on hand. Here are some ideas:
1. Pay off debt. Start by evaluating all the debt you have—look at credit cards, car loans, other product finance plans, variable rate HELOCs, and any other loans. Prioritize paying down balances with the highest interest rates first. One caveat here: you may want to pause on paying down student debt until any potential governmental student loan forgiveness programs are officially ironed out.
2. Refinance where it makes sense. If you have a mortgage or home equity loan/line of credit, consider refinancing if you can get a lower rate for a similar or shorter payoff term. Work with a credit union lender, mortgage broker, or bank to do a comparison and see if the payments are affordable. There may be a few thousand dollars in fees due if you decide to refinance, so consider this in the comparison and determine where the extra cash may come in handy. If you are planning to move soon, or if you have a great rate already, refinancing may not make sense for you.
3. Make sure you have a comfortable emergency reserve. The financial planning rule of thumb here is 3–6 months expenses, but this should be customized for each person or family. Now is the time to put this money away so that you don’t have to utilize new credit for any unexpected expenses, job loss, or other unforeseen circumstances. A healthy emergency reserve helps increase your financial peace of mind, which is a win–win for your overall health and well-being.
4. Maximize opportunities for retirement savings. Speak to your financial advisor or tax accountant to see if you can contribute more to your IRA, Roth IRA, or other employer-sponsored retirement plan. Consider making a one-time contribution where you can, or even increase your monthly auto-contributions if you feel your state of abundance in cash flow is sustainable.
5. Consider a Roth conversion. This strategy may not be attractive for everyone, but it can be quite compelling for some. The younger you are and the lower your current year tax bracket is, the more this strategy could make sense. The analysis is very individualized, but the basic idea of this is to convert some of your traditional IRA (pre-tax dollars) over to a Roth IRA. You would need to pay income tax for the year in which you convert, and so the extra cash you have on hand could be great for this expense. Once converted, your retirement savings would be within a Roth status, which provides the potential for tax-free growth. It is also very attractive to families who want to transfer wealth in a more favorable tax status. Of course, you’ll want to consult with your tax advisor regarding this strategy.
6. Consider building up your medium-term investment bucket. We help clients think of their money in three buckets: cash reserve, medium-term investments, and retirement. Many times, people have cash savings, and then investments in their retirement accounts—but nothing in between. As someone builds wealth, a point is reached where the emergency/cash reserve is plentiful, retirement accounts are well funded, and the decision is made to invest some of their non-retirement cash savings into other kinds of investments. A taxable brokerage account works well for this and can be customized to your personal preferences.
It is my hope that some of these ideas will inspire you to save and promote abundance throughout your financial life! Should you have any questions or are looking for financial planning advice, investment services, or ways to save smarter for your retirement—don’t hesitate to contact our team at TrinityPoint Wealth.
Wishing you peace and universal support in the days ahead, one day at a time.
Dana R. Mascalo CFP®, RLP®, AAMS®, C(k)P® is a Managing Partner with TrinityPoint Wealth, an independent SEC Registered Investment Advisory firm in Milford, CT and Charlotte, NC. Dana advises high net worth clients with complex needs and is sought after by individuals, families, business owners and executives all over CT and the United States. Acting as their personal CFO, Dana looks at a client’s entire financial life with a visionary lens, advising on investment portfolios, retirement planning, stock options, life transitions, exit planning for business owners, customized advanced cash-flow planning and multi-generational wealth transfer strategies.
This material presented is for informational purposes only and is not intended to serve as a substitute for personalized investment advice or as a recommendation or solicitation of any particular security, strategy, or investment product.
TrinityPoint Wealth, nor its investment advisory representatives are permitted to provide legal or tax advice, and nothing contained in these materials should be taken as legal or tax advice. Source: Used with permission from fpPathfinder.com.