Cash Management: How to Manage the Extra Money in Your Pocket

February 23, 2011

Have you ever found yourself at the end of the week with a little extra cash lying around?  (I know, it doesn’t happen that often, but when it does, what exactly do you do with it?)  For many, they just simply find something to spend it on, and who wouldn’t.  I mean after all, you’ve worked hard all week to earn it, so why not enjoy it.  Well, I can’t argue with that, but there may be another reason why you’re not sure what to do with it: you lack financial goals.

Last week I met several young people who are facing this very dilemma.  They’re fresh out of college, so they are used to living on next to nothing, and they’ve chosen to live below their means (i.e. they’re frugal).  They end up with a little extra dough at the end of the month and they’re wondering what they should do with it.  So what exactly am I telling them?  Here are three things that they, and all of us, need to consider when we find ourselves in this situation:

I. Define your financial goals

I can’t help anyone decide what to do with their money unless they have some kind of goal in mind.  For the people that I spoke to, many would like to go back to school and earn an advanced degree, but they would also like to pay off their student loans, start a family, or buy a car (used, of course).  And these are just some of the more immediate goals.  Long-term goals might include buying a home, paying for a child’s education, or retirement.

Before you ask “What should I do with my money?” do yourself a favor and jot down some financial goals.  In general, the more specific the better, but even having a hint of what things you may need to spend money on in the future will help.

II. Prioritize your financial goals

Once you start to list your financial goals, you’ll soon realize that you have more ambition than money.  Welcome to financial planning 101!  I’ve always said financial planning is about taking a limited resource (i.e. your money) and using it to satisfy unlimited goals.  You can’t possibly fund every financial goal you’ll ever have, so you have to decide which ones are most important today, and which ones will have to wait.

III. Cash is King

Here’s what I want you to remember.  Money we save is money we get to spend later.  When we spend money now, we take away the option of using it later for something else.  This is most applicable to the decision to save more or pay off debt.  I’m all in favor of paying off debt, and as long as you have an emergency fund, I’m okay if this is the financial goal you want to satisfy.  But I spoke to some recent graduates that have student loans with interest rates as low as 2.5%.  They could use their extra cash to pay down these loans, but if they later decide to pursue an advanced degree, which many of them indicated they would like to, they’d probably have to borrow again, and at a much higher interest rate.  I simply reminded them that if they saved the money now, they could always use it to pay down the debt later, but if they decide to go back to school they’d be glad they had it.

So there you go.  Some simple things to remember the next time you find yourself wondering what to do with your extra cash. 🙂