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Give the dollars a job


Most of us have jobs, or have had a job at some point, even if it wasn’t a paid one. When you are doing that job, are you supposed to be doing a different job? (I am not referring to dysfunctional workplaces here). Probably not - you have a set of skills and things you’re good at, and your responsibilities reflect that.

Your money should also have a job, and that job isn’t necessarily to grow a lot. In fact, some of your dollars should have the opposite job. Growing over time involves risk of loss. That loss is hopefully temporary, but if it comes at the wrong time, it can be disastrous for your short-term financial health and your upcoming goals. If your income is stable and sufficient to meet all of your short-term needs, including big-ticket items, then great! But usually, big purchases and a healthy emergency fund require at least some dollars funneled toward short-term savings. For those dollars to perform well - to do the job you need them to do - they need to be there, available and in the right amount, any time you need them. That means giving up the expectation that they will earn a lot of interest.

Understanding your cash flow - really understanding it - is the foundation to a solid financial plan. Anyone can tell you to max out all your various retirement savings options, and put additional money in an investment portfolio besides that. But if that advice isn’t precipitated by making sure the dollars are there in the first place to do that, and they’re not needed for another job, then two things will likely happen:

  • Money that should meet a short-term need, like paying the electric bill or buying groceries or being ready for a home down payment, will not be there. That will lead to consumer debt or getting behind on bills, or not achieving a goal you have when you’re otherwise ready for it

  • More importantly, your financial plan won’t really be aligned with your life goals, and you won’t be satisfied even if that investment portfolio grows

Given the low interest rates we’re earning now, and will continue to earn for a while, it can feel like you’re giving something up by keeping money parked in a bank account. Certainly, research your options to make sure you’re earning the most you can on your cash. And also, thoroughly examine your spending and have a gut check to determine what an appropriate emergency fund looks like for you (if you need a starting point, consider 3-6 months of essential spending a reasonable one: that’s how I usually counsel my clients to begin thinking about it; you can increase or decrease from there). If you don’t have any upcoming plans for a big purchase - home down payment, auto, wedding, kids about to go off to college - and your emergency fund is where you want it to be, then it might make sense to consider other uses for your excess earnings. But remember that those dollars will take a different role in your financial health, and different rules will apply to them.

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