What Should I Do With Excess Cash?

A reader asks:

I am married with a 2.5-year-old daughter and my parents are also dependent on me. I bought a house in 2017 and I have a $253k loan on my 30-year mortgage @ 3.75%. I have $208,000 in my retirement accounts, including 401k and I have $3,100 in a 529 account. $32,000 in an overseas CD earning 6%. I have $61,000 in an emergency saving account earning 2%. And I have $134,000 in a savings account earning 2% And I don’t have a taxable investment account. So my question is what should I do with excess cash?

The good news is this reader is a diligent saver. Having excess cash is a good problem to have but it can be a problem nonetheless.

Cash offers optionality and provides a margin of safety but it can also become an addiction and is not the best long-term holding because you’re almost guaranteed to lose to inflation over time.

There is no right or wrong answer, of course, but there is a framework to think through these types of issues.

Here are some questions I would work through when thinking about how to deploy excess cash:

What is my time horizon for this cash? Anytime you’re allocating capital you always have to tie your money to goals and time horizons. If you can’t or don’t define those up front your chances of making mistakes or having financial regrets rises exponentially.

One of the biggest mistakes people make when allocating their money is confusing their time horizon with the time horizon of other people.

One of the reasons this becomes problematic is because almost everyone has multiple time horizons attached to various financial and life goals.

Syncing your assets with the timing of your liabilities is a simple, yet often overlooked first step.

Which financial goals/decisions have been weighing on me the most? Thinking in extremes with your finances is a good way to invite regret into the equation after you make a decision so there’s no need to use your cash for a singular goal.

Spreading the money around can be a nice way to diversify your competing wants, needs, and goals. A good way to go about this is to figure out which areas of your financial life have been causing the most stress for your family and address those first before moving down the list.

What are my unique circumstances? This reader has a child, a mortgage, and some savings across a number of different account types so that’s not too out of the ordinary. But they also have parents that are dependent on them financially which is something of a unique situation.

I don’t know the details of the situation but you always have to take into account your own personal circumstances when making these decisions. Everyone’s situation is always a little different so don’t try to plan based on what other people are doing with their finances.

Taking care of family members could require it’s own savings bucket depending on their needs.

Is there a way to improve my tax situation here? I’m not a fan of making financial moves strictly to save on taxes but people do seem to find a spark of joy by lowering their tax bill. Tax aversion has to be a stronger force than loss aversion for most investors.

So figuring out how to utilize the various tax-deferred accounts at your disposal — IRAs, HSAs, 529s, etc. — could offer a nice daily double of financial gains in terms of investing while also taking advantage of tax breaks.

How do I minimize regret in this decision-making process? No one in the history of the world has figured out the perfect equilibrium in their financial decisions because there are always trade-offs in what you do with your money.

It’s tempting to put your cash to work in a way that will offer either the best short-term feeling of relief or the best long-term prospects for growth but these things always need to be balanced to achieve financial zen.

Minimizing the number of regrets you may have depending on a range of outcomes is my favorite way to approach these decisions.

What will my cash allocation policy look like going forward? This is important because you don’t want to get in the habit of constantly building up cash and then stressing out over what to do with it.

Have an allocation plan in place when new funds come in and make it automatic so you don’t even have to think about it with any new money coming in that will go towards some type of savings.

Further Reading:
The Psychology of Sitting in Cash, Part Deux