What To Do With Your Stash Of Cash

The right answer usually isn't always all or nothing. Life isn't so black and white.

Enter a young couple, Tyler and Samantha (not their real names). Tyler is the son of one of my clients. When they sat across from me in the conference room, he said, "I have $30,000 saved up and want to pay off my car. I hate debt. The only thing we owe is our mortgage and this car loan."

Now, this was an unusual situation for me. In fact, I was shocked that they had saved up this much money while saving in a 401(k) and buying a house in the past two years. Clearly, I was dealing with a couple that is good with money. Plus, they have a baby on the way!

Your first gut reaction may be to say, "Yes, pay off that debt! Get rid of that $500-a-month car payment.”

But there are other considerations. One of the greatest challenges of managing your money is that you will always have multiple goals. Financial decisions can’t be made in a vacuum.  

Let’s take a closer look at the couple’s financial situation.

Tyler and Samantha are expecting a baby this year, so they want to start a college savings plan. They also need to save for retirement. He is currently investing in his 401(k) up to his company match, but isn't contributing the 10% target yet. She doesn’t have a 401(k), and neither of them has a Roth or traditional IRA.

They have an emergency fund with four months of expenses and they pay off their credit card each month but aren’t maximizing a rewards plan.

Here are a few ideas that could take them from being good with money to being great with money.

Fund a Roth IRA.

Tyler and Samantha could each open up a Roth IRA for 2017 (before the deadline of April 17th, 2018) and contribute the maximum (which for them is $5,500 for 2017 and 2018). Once they have funded for 2017, they can set up automatic monthly contributions to their Roth IRAs so they can contribute the max for 2018 as well. If that proves to be too much, they could choose an amount they know they can afford each month, even if it's only $50 each.

Open a 529 plan for the baby on the way.

One of the best ways to save for higher education is a 529 college savings plan. The beauty of this savings plan is that the funds you invest grow tax-deferred and ultimately can be withdrawn free of income tax if used for qualified education expenses such as college tuition, books, and room and board. The Tax Cuts and Jobs Act of 2017 expanded the law to include K-12 private school tuition up to $10,000 per year.

Even though the baby isn’t born yet, they can still open a 529 plan for “baby on the way.” The couple can open a 529 in one of their names, with the other as the beneficiary. When the baby comes, they can change the beneficiary to the baby. I suggested Samantha and Tyler contribute $1,000 to start and set up a monthly automatic investment plan for an amount they can easily save.  

The Utah 529 plan has no minimum investment requirement, so they can even contribute $10 a month if they want. They can also let grandparents and aunts and uncles know how to add to the account for baby’s future birthdays.

Reserve fund for emergencies.  

Samantha and Tyler already have four months of expenses in their savings account in case of emergency. Roth IRA funds can be a back-up for emergencies as well since you can withdraw the principal without an I.R.S. penalty at any time.

The Roth IRA funds can help this couple get to the ideal six months of emergency funds available.

Pay extra principal payments on the car.  

With those goals addressed, now they can consider how best to pay off the car. The couple could look into refinancing the loan to get a lower interest rate and reduce the monthly payment, or they could consider paying down the principal faster with a larger payment to shorten the life of the loan.

When they pay off the car, they can take that $500 a month and direct it toward a savings account to save up for their next vehicle. This way, they won’t have to take a loan for a vehicle again!

Another money move this couple can make is to research rewards cards so they either get cash back for purchases or points to use for merchandise or travel. This way, they can use their points to travel by air to visit the grandparents!

Now that you’ve heard my ideas, what you would recommend for this couple? More importantly, think about the multiple goals you have and how to fund each one of them.



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I write about living well while transitioning to retirement, working in retirement and personal finance. We can have it all – a rewarding career and fulfilling personal ...