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How Clients Can Put Their Extra Cash to Work in 2020

More time spent at home during the pandemic has meant more extra cash for those who remained employed. Instead of blowing the windfall on a treat, finance guru Bryce Sanders recommends putting the money in one of these six smart places.

Sep 3rd 2020
President Perceptive Business Solutions Inc.
Columnist
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save money during pandemic
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Not everyone has been struggling during the pandemic. If your salaried client is being paid to work from home, they enjoy continued income, reduced personal expenses and, possibly, a government stimulus check. They are in the enviable position of having extra cash on hand. It’s “found money.”  What’s the most efficient way to put it to work?

What to Think About

How much debt does your client carry? A 2019 Experian study showed the average American has personal debt of $ 90,000+. This varies by age. Gen Xers carry the most, around $ 135,000+. It’s a bell-shaped curve across the age spectrum. Debt means interest payments.

What to Avoid

Clients often think of extra cash as a windfall. Although Gallup tells us the average American family planned to spend $942 on gifts last Christmas, many of the ads you saw on TV were from car companies or jewelers. There’s a temptation to treat yourself to a big-ticket item for withstanding everything 2020 has thrown at you. Ads say “You deserve it” and “Economize someplace else.” Remind clients after-tax dollars are very hard to come by.

Six Places to Stash Your Windfall

This isn’t a huge bonus. It’s a few thousand or even a few hundred dollars, left over from their budgeted monthly spending. The bank temptingly labels it: “Your available cash balance.” Not only must the move make sense to your client, but it also needs to be easy.

  1.  Reduce Revolving Charge Card Debt: This is probably the best use for most people. According to USA Today, the average American carries $6,200 in revolving charge card debt. Like fat, it’s easy to put on and difficult to shed.  Here’s an opportunity.

Pros:

  • Retiring high interest rate debt. The average national rate is 14.52% (8/24/20)
  • Reducing your outstanding debt should improve your credit rating.
  • Interest on consumer credit card debt is not tax deductible.
  • It’s easy. Write a bigger check to the credit card company this month. Make a payment online or by phone.

Cons:

  • There's the temptation to repeat the same mistake and run up balances.
  • They might feel discouraged, like they're chipping away at an iceberg. However, any progress is good progress.
  1.  Establish an Emergency Fund: Everyone knows they need one. According to bankrate.com, less than three in ten Americans has an emergency fund. Get the excess cash out of the checking account and into a savings account. Put it somewhere that is difficult to access.

Pros:

  • The money is available if you need it.
  • It’s in cash. There is no bad time to sell.
  • There are no transaction costs.

Cons:

  • There's a temptation to spend it. “The money is just sitting there…”
  • Low interest rates on short-term deposits.
  • Interest earned is taxable.
  • Setting up a savings account or additional bank account takes effort. The key is the money shouldn’t be easy to touch.
  1.  Put the Money Towards Retirement Savings: Most Americans are ill prepared for retirement. Your client might have skipped their annual IRA contributions.

Pros:

  • Usually a longer time horizon. More choice of investments.
  • Growth is tax deferred.
  • Out of sight, out of mind.
  • The feel good factor. They’ve done something positive.

Cons:

  • Money is not easily available if you suddenly need it.
  • Tax issues if you withdraw funds before age 59½ (although there are some exceptions).
  • Products can involve fees. Some are substantial.
  • If invested in the stock market, volatility can be upsetting.
  1.  Invest the Money: Low interest rates have made the stock market popular. 

Pros:

  • Growth potential, assuming you can think long term.
  • It's out of your checking account, so there's a reduced urge to spend it.
  • Your client might already be an experienced investor.

Cons:

  • Principal risk: Past performance is no guarantee of future results. 
  • They need a long-term time horizon because of cyclical markets. If you need the money, it might not be a good time to get it.
  • Transaction costs.
  • Any gains and income are taxable.
  1.  Paying Down a Mortgage or Home Equity Loan: Many Americans have one or both.

Pros:

  • Paying down your home equity line of credit frees up borrowing power if needed later.
  • Reducing your indebtedness over time can improve your credit rating.
  • Although you are reducing the principal value of the loan, the interest charged is tax deductible in most cases.

Cons:

  • Mortgage and home equity rates might be the lowest you pay on borrowing.
  • No sense of urgency. The Federal Reserve is signaling a long-term low interest rate environment. The client’s low variable rate might stay low for a long time.
  • Even if they reduce the outstanding balance, the money is almost too easy to access for impulse purchases.
  1.  Add to Your Children’s 529 College Savings Plans: You know education is a big future expense. In 2020, the average cost of a private college is $ 46,000+. A state school is still expensive at $ 20,000+. Imagine what it will be when your children are ready to go!

Pros:

  • There’s usually a long timeline until the money is needed, a plus with the cyclical nature of the stock market.
  • Income and capital gains are taxed at a lower level.
  • Recent legislation has expanded allowable reasons for withdrawals.
  • Once you are actively contributing, it’s easier to encourage relatives to direct holiday giving towards the college fund.

Cons:

  • The money no longer belongs to you, although the parent controls it.
  • When your child reaches maturity, they can request the money for themselves instead of using it for education expenses.

People with extra cash available often find a reason to spend it. You can advise your client on how to put it to the best use based on their situation.

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