In a New York Times article last month, Daniel Leonhart explored how so many Americans could afford not to work. And his answer?
Jean Ralphio says it best:
So what does it mean to be flush with cash?
It’s when you’ve got more money than you’re used to all of the sudden, and usually only for a short amount of time. It makes sense that so many Americans are in this situation due to the economic relief payments and increased unemployment benefits that we experienced as a result of Covid relief measures.
Leonhard explains that “the recent increases in savings have been larger at the bottom of the economic spectrum than at the top,” which is awesome. But, “the financial cushion of most households still is not large…it’s still only about $1,000.”
When you’re flush with cash it can feel like that extra money is burning a hole in your pocket, and that’s what I want to talk about today. There are two money moves you can make right now with that extra cash to help you build financial freedom and make sure you’re flush with cash in the future too.
1. Build Your Emergency Fund
Covid definitely taught us how important it is to have money saved in case something unpredictable happens. An emergency fund is a specific amount of savings that can sustain you for a few months in the event that you lose your job or just don’t have any money coming in. A good rule of thumb is to have enough money saved up to cover 3-6 months worth of savings in the event that you don’t have income all of the sudden. Here are the steps you need to take:
Figure Out Your Monthly Expenses
To figure out how much you need to save, you first need to know your monthly expenses. Here are a few options you have to help you figure this out:
Use Your Bank’s Budgeting Tools
If you use online banking, take a look at your bank’s budgeting tools. Most banks have a budgeting tool that helps you see your expenses broken down by month, as well as your spending trends over time.
Use Personal Capital or Mint
Both Personal Capital and Mint have built-in budgeting tools that show you exactly how much money you spend every month, and they even provide suggestions about where you can cut some costs. I prefer Personal Capital because of the added investor benefits like viewing your entire investment portfolio and net worth in one place, but both tools work great for figuring out your monthly expenses.
Build A Spreadsheet
Build a budget spreadsheet using a free template. This might be the most time consuming option, but if you’ve never gone through the exercise of writing out all of your monthly expenses and plugging them into a budget manually, choose this option. It’s a great way to think through all of your expenses and even spot a few places to save money. You might realize you’re paying for something that you never use. I go through a manual expense review like this yearly just to make sure I’m not overlooking anything.
Define Your Emergency Fund Amount
Once you know what your monthly expenses are from using one of the above options, you need to decide how many month’s worth of expenses you need in your emergency fund.
On the Queer Money Podcast episode COVID’s Impact on Your Financial Well-Being, David and John interview Mili Mittal from Capital One about the results of a Capital One study about how Covid has impacted our ideas of financial well-being. One of the main takeaways highlights that “the pandemic caused 48% [of respondents] to increase the amount of money they believe they need in their rainy day fund.” Respondents on average added one more month of pre-pandemic savings to their emergency fund, and I did this as well.
My emergency fund now equals 6-months worth of living expenses to keep me afloat in case the world shuts down again. Decide how many month’s worth of savings you need to be comfortable and then fund your new emergency amount with some of that Covid money.
2. Open Your Roth IRA and Contribute Regularly
A Roth IRA is a long term investment account that offers great tax benefits. You fund the account with money that has already been taxed, so when you take it your money out later in life, you don’t have to pay taxes on any of your earnings.
This account is also specifically made for people who are on the lower to middle income levels of the economic spectrum. If you make more than $125,000 a year as a single taxpayer then you don’t qualify for this account.
Let’s say you open the account at age 20 and start with an initial investment of $1,000. You then contribute $50 a month in the account until you retire at age 65. If your investment earns an average return of 8% (which is the average stock market return since its inception), then you’ll end up with $282,376 TAX FREE dollars. That number can be even higher if you contribute more, so find out what amount you want to retire with using a Roth IRA calculator.
Takeaways
Use some of your Covid cash to pad your emergency fund, and then open your Roth IRA and start investing ASAP. If you start now and contribute regularly then you’ll really be flush with cash when you retire.
You may even burst out in song like Jean Ralphio when you realize how much money you have.
For specifics on how to open this account and start investing right now, check out I WANNA ROTH.
Disclaimer: I am not a certified financial advisor and this article is intended for educational purposes only