Last year, I sat down with a couple in their 30s who’d heard the same message their whole life: Save often, save early. And that’s what they were doing.
Working under the assumption that any and all extra dollars should go to retirement (they already had an emergency fund in place), they were maxing out their employer plans through work and funneling all the additional cash that flowed through their hands into accounts also designated for retirement. But eventually they started questioning this approach, wondering if there were other, better ways to use those funds. They had dreams for their kids as well as other objectives in life — should some of the money be allocated to those things as well?
Wondering what to do with extra cash is a recurring theme among many clients; often it’s what propelled them to come to a financial advisor in the first place. You might be in the same boat — you suspect there’s something better or smarter you could be doing with your money but you find yourself stalling because you’re a bit overwhelmed. A financial advisor can help you explore possible next moves so you can use those funds in a way that supports your long-term goals.
That was certainly true for this couple. In their case, we did some long-term financial projections and found they were more than on track for retirement — they were actually going to be hyperfunded way ahead of schedule. Knowing that allowed them to safely consider other options for their extra cash that aligned with their life plan.
In this article, you’ll learn what constitutes “extra cash,” as well as what a financial advisor can do specifically to help you allocate money confidently.
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Do I need guidance on what to do with my extra cash? Telltale signs the answer is yes.
Often, when people see they have a lot of money in cash, their first thought is, I should create a rainy day fund. You may have thought the same and already taken a chunk of your extra money and set it aside for various unexpected expenses, such as car repairs, house repairs, extended illnesses, or unemployment. You may have also set some aside for an upcoming vacation.
If money still remains after that, you might put it in CDs, money market accounts, or high-yield savings accounts — a smart move compared to keeping it in traditional bank accounts.
But if you feel like you’re following all the tried-and-true methods — you have that emergency fund, you’re putting money away for retirement and possibly college tuition — and you still have more than you need sitting in cash, you might wonder what comes next. You probably know there’s something beyond these basic options, but the number of choices can make it hard to know what to do next.
You might have a sense there’s more you could be doing, but not feel fully clear on what that is yet. And as a result, you aren’t making any decisions at all.
If you find yourself in that position, you’re likely ready for a financial advisor. People in the early to mid-career stages who are living below their means often face this situation, whether they are part of a single-income or dual-income household, with or without kids. Whatever situation you’re in, an advisor can help you figure out how to use those funds optimally to build the life you want. This process involves doing three things: clarifying your cash flow, identifying your short-term needs, and building a long-term financial plan.
Step 1: Clarify Your Cash Flow
An advisor will typically start by mapping your ongoing cash flow: the money you have coming in and going out on a daily, weekly, and monthly basis. This exercise clarifies whether you really do have “extra” cash. If you have cash on the side but dip into it throughout the month then pay it back each time — almost like a personal bank — that’s not the type of excess we’re talking about in this situation.
True discretionary dollars are ones that remain untouched and are growing steadily, beyond emergency funds or short-term needs like vacations. It’s important for your advisor to understand your situation clearly before they can create a plan.
Step 2: Identify Your Short-Term Needs
The next question that I would ask you is to tell me a little bit about what’s coming up for you in the next one to two years. You might know of some upcoming lump-sum expenses such as car replacements, daycare costs, or house purchases. These short-term items justify keeping cash liquid.
Even after allocating for these, if money remains, it’s time to explore beyond basics.
Step 3: Build a Long-Term Financial Plan
Advisors need context to help guide you in the right direction. So they’ll want to have an idea about your vision for life and understand what’s important to you. If you haven’t already, this is the perfect moment to think more deeply about things like your long-term goals, timeline, and risk tolerance so you can ensure your plan allocates money in the best way to support your future.
Here’s where the true power of an advisor comes in: They can help you connect the dots between what you do now with your money and what may happen 30 years from now as a result.
Taking all the information you’ve given them, the advisor will integrate everything into a holistic plan, projecting scenarios like “What if this extra cash goes to retirement, college, private school tuition, a home purchase, or spending now?” Advisors can model impacts over decades, often to age 100. (We’re wishful thinkers!) This exercise will reveal if you’re on track to reach your goals or if you’re overfunding certain goals, which will free up options for spending or redirecting cash today.
Taking all the information you’ve given them, the advisor will integrate everything into a holistic plan, projecting scenarios like “What if this extra cash goes to retirement, college, private school tuition, a home purchase, or spending now?”
It’s important to note that while your advisor provides the information you need to make decisions, you are the ultimate decision-maker! Our job is to empower you so that financial decisions become easier and more straightforward. If you’re going about this alone, you’re missing a huge piece of information, and that is knowing the impact of today’s decision on the future. We can help you see that impact clearly — and that’s the true value of an advisor.
In the case of the couple I mentioned earlier in the article, our financial projections allowed them to make the decision to enjoy more of the money they were earning. And when we talked about their goals and values, their kids’ education was revealed as one of the top priorities. They ultimately decided to switch from public school to private school because they finally had an understanding of how their decisions today were impacting their long-term vision.
If this is something you’ve been thinking about, we’re always here to talk it through with you. Our first priority is always to understand your life, your goals, and your dreams — everything we do starts from there! Start a conversation with us today!
