A close friend of mine approached me about three years ago with the question, “Hey Derek, I have about $15,000 just sitting in my bank account earning practically nothing. What do I do with it?” At the time, I had just paid off my consumer debt and was scrounging up all the money I could for my first house purchase. At this stage in my life, I had absolutely no idea what he should do with his money.
Being a typical guy though (especially a guy that graduated in Finance), I definitely didn’t tell him that I was without a clue! My first response was that he should start an online business and earn more money with his money. Needless to say, it wasn’t the answer he was looking for and he never asked about it again. To this day I’m not really sure what he did with that $15,000. It’s probably still sitting in his bank account.
Now I’m The One Asking the Questions
Three years later and now I’m the one asking the same question, “What do I do with my increasing pile of cash?” I know, I know, these problems are so terrible to have (note the sarcasm)!! But, if you are not here already, you will be soon and then you’ll be thankful that I experienced this before you did so you can have the easy answers. About a month ago, I took this question to Google and there was little help. Just yesterday though, I thought I would try again to see what kind of information was out there. I searched, “What do you do once you have money?” Here are the top results from my buddy, Google: Really Google? This is the best you could do? First of all, just because I have money does not mean that I won the lottery. Secondly, I do not need financial aid. And lastly, I don’t need help collecting money from a lawsuit. These top results are terrible. This just goes to show you how few people are actually looking for ways to increase their wealth.
The Typical Response to Excess Cash
Everyone has what I call a “spending trigger“. It’s a certain amount that, once reached, triggers spending. This amount is different for everyone. For some, once they get $500 in their bank account they suddenly have a “need” to buy some new clothes or a new video game console. For others, they don’t hit their spending trigger until they hit $10,000, but then they suddenly decide that they should buy a new car or remodel the kitchen. Once people hit their spending trigger, their savings account evaporates. So why do people have spending triggers? Why are people continuously spending money on things that they don’t necessarily need?
- Greed – Bigger, brighter, and faster is a constant want for all of us. It’s just how we’re wired. No matter how much we have, we just need to get a little bit more…
- Advertising – Companies bend over backward to make their product desirable, and it works. Throughout our entire day we see advertisements that draw us in and increase our wants.
- We don’t know what else to do with it – This is the biggie. Sure, we’re greedy and are constantly being sold a product, but for those of us that are able to save money for a while, but then suddenly spend it, our issue is laziness. No one is born with wealth knowledge, and few are driven enough to figure it out. Without seeking out the information, we never learn what to do with our money, so we resort back to what we know how to do: spending it.
When you look at them, these excuses are pretty sad, but they are the exact reasons why people don’t have savings accounts these days. They either spend out of greed, out of a lack of willpower, or due to a lack of knowledge.
Alright, so now we’re getting into the meat of it now. If you’re free from debt and are building cash, you need to figure out the answer to the question, “What the heck do you do once you have money?” Unfortunately for all of us, the answer is not a simple one, even though all the articles and books would have you believe it is.
“The experts” love to tell you to put all of your excess cash into stocks and bonds so that it will grow into a large nest egg when we’re older. Well, the result could be a large nest egg, but there’s no guarantee. Plus, what control do you really have with this option? Sure, you can pick out certain stocks and bonds that you think might perform best, but you have no control over the company that moves the stock price or the interest rates that cause the bonds to fluctuate in value. Once you put your money in you just have to wait, twiddle your thumbs and hope that your proverbial horses win the race and pay out some cash.
My initial answer for what you should do once you have money has been real estate, but this isn’t for everybody. And, if you want to buy your real estate with cash (like I would suggest), you’re going to have to wait a long time before you invest any of your savings. So, what can you do with smaller amounts of cash in the meantime? Here are a few of my thoughts:
- The Stock Market – Even though there is no guarantee that the stock market will go up, that has been the historical story. I am currently putting 6% of my disposable income in my company 401k plan (index funds to be exact). After the company matches and bonuses, this becomes approximately 15% of my yearly income.
- The Credit Union – This might sound like a stupid option at first, but my credit union pays out 3% interest up to $15,000. That means I earn $450 each year for doing absolutely nothing. It’s a pretty sweet deal – you should see if there are credit unions that offer this in your area.
- Your HSA – Very few people realize how beneficial a Health Savings Account (HSA) fund can be. The money is never taxed as long as it’s used for health related expenses (contacts and glasses fall into this category too by the way) and you can invest it once you build up the savings to $2,000. Since taxes can be avoided entirely and you’ll most certainly use the money at some point in your life (ever hear of long-term care??), everyone should fully fund their HSA once they are completely debt free.
- Commodities – Gold and silver have proven to be pretty decent investments when the economy is shaky. There is a just a sense of security when you can hold a valuable item in your hand, rather than a piece of paper that supposedly proves you own something valuable.
- Become an Angel Investor – When people have a business idea and need funding, they typically go to the bank. But, if they do not present their idea in quite the right manner, they might get declined even if their idea is a good one. If you have a decent amount of cash, why not offer them some of it and require a percentage of the company. If you believe in their idea and are excited about it, why not be their angel investor and give yourself a chance at some huge profits?
- Start Your Own Business – If you aren’t big on the idea of handing your cash over to someone else, then why not start your own business that you have complete control over? It could be something simple like buying ski equipment from garage sales and selling it on Craigslist, or it could be as complex as developing a more efficient, cheaper source of energy.
Don’t Spend It, Invest It
The most important takeaway from this post is to get off your butt and educate yourself. Since you have successfully piled up the cash, chances are that you don’t really need it now, so the best option is to invest it for the future. Sure, you might have to dig a little bit for the resources that’ll instruct you on what the heck to do once you have money, but they ARE out there. And, even if you can’t find anything, you can always brainstorm with me (derek [at] lifeandmyfinances.com). I’d love to hear from you!!
What do you do with your extra money?
My name is Derek, and I have my Bachelors Degree in Finance from Grand Valley State University. After graduation, I was not able to find a job that fully utilized my degree, but I still had a passion for Finance! So, I decided to focus my passion in the stock market. I studied Cash Flows, Balance Sheets, and Income Statements, put some money into the market and saw a good return on my investment. As satisfying as this was, I still felt that something was missing. I have a passion for Finance, but I also have a passion for people. If you have a willingness to learn, I will continue to teach.