Ask Dana! Experiencing an Abundance of Cash? Here Are Six Ideas
By Dana R. Mascalo CFP®
ately, 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 experi- enced during the pandemic. Another com- mon 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.
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There are countless personal circum- stances 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, vari- able 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
, RLP® , AAMS® , C(k)P®
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 pay- ments 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 plan- ning 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 advi- sor or tax accountant to see if you can contribute more to your IRA, Roth IRA, or other employer-sponsored retire- ment plan. Consider making a one-time contribution where you can, or even in- crease your monthly auto-contributions if you feel your state of abundance in cash flow is sustainable.
5. Consider a Roth conversion. This strat- egy 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 ex- pense. 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,
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