What should I do with cash?

It does in fact rule a number of things around me.

Photo by Tamara Gak on Unsplash

(Before you do anything else, go back and remember when the Wu-Tang Clan broke out. C’mon that still hits so hard! Method Man is chewing on a friggin’ TOOTHBRUSH for crying out loud! The only thing harder than that toothbrush is — maybe — Rich Brian’s fannypack. Maybe.)

A few friends have asked versions of this question, but C.R.E.A.M. aside, this is really two different questions, i.e.,

What should I do with surplus money (after paying all my expenses)?

vs.

What should I do with liquid cash money (while it’s just sitting there in my bank account)?

(If you’re looking for advice for people sitting on huge stacks of actual paper currency, Money for Dope Dealers is down the hall and to the right.)

The surplus question is the much more complicated question, so let’s start there and then I’ll give you my take on what to do with that actual ca$h money.

SURPLUS MONEY

This is of course extremely situation-dependent, but no matter your situation, you want to start with the obvious: pay down debt.

• This assumes your “expenses” only consist of interest payments rather than principal — you def want to pay principal!

• I can’t get with the Dave Ramsey vibe, tbh, but even I have to admit that the “debt snowball” and the “debt avalanche” seem like very solid practical wisdom. (I’m not linking to Dave though.)

• A good primer on choosing between them: snowball v. avalanche.

• All of which requires you to have a very good handle on your student loan interest rate vs. your credit card interest rate vs. your car loan rate vs. whatever else debt rate.

• Meanwhile, to state the obvious, if at all possible you want to try not to carry any debt in the first place. My children have dubbed our janky old Honda Odyssey “SadVan,” and it is indeed a homely specimen, but you know what? I paid $3900 cash for it and it’s hauled our family around for the past five or six years with nary an issue except the fact that the sliding doors hiccup and stick all the time. Irritating as hell for sure, but compared to the the average American car payment of $738 PER MONTH for a new car and $532 for used?!?! I will take SadVan any day of the week.

• That said, most of us didn’t come from money, and we probably had to take on debt to go to college, or go to grad school, or get to work, or eat—I totally get it. But if you’re in debt, you want to accelerate the pace of getting out of it.

All this brings us to an important subset of the surplus question:

Should I focus on paying off my mortgage first (i.e., treat it the way I treat other debt)?

Fixed-rate mortgage debt seems like a whole ’nother ball of wax to me. Yes, the bank owns your house until you’ve paid off that loan. Yes, it is very, very worthwhile — maybe mission-essential — to go into old age and retirement without a mortgage to pay each month. But in the near term, I don’t think you want to focus so exclusively on paying off the mortgage that you don’t have any other savings.

In that vein: Years ago I worked with a teacher who was approaching retirement, had a disabled adult child at home, no spouse in the picture, and was killing herself to pay off a 15-year mortgage so that she could retire without a housing payment. To my mind, that is not the move. In the near term, it meant every last cent went to the mortgage, so they had to be beyond frugal in how they lived. But it also meant that she was doing nothing for retirement beyond the fact of her public-employee pension. She was a public-ed lifer, so actually her PERA pension was probably pretty great (come to think of it, she must be retired now and drawing that lifetime monthly benefit. Get it, Ms. Rae!). But the idea of having only that one source of (not inflation-adjusted) retirement income beyond Social Security seems dicey to me. I would much prefer to have multiple and various buckets to draw on and diversify my risk.

Remember, too, that your fixed-rate mortgage loan…

• Can potentially be refinanced to get a better rate in the future (although if you were able to get one of those crazy sub-3% loans during the pandemic, you should just be sitting tight and congratulating yourself for being so damn savvy);

• Is building equity in the home; and

• Is being paid on a home that is gradually increasing in value.

All of which is to say that mortgage debt is not like other debt, and should not be treated with the same hostility. Paying a little more toward the principal is great if you can swing it, but I would not miss out on building a bigger retirement fund in order to zealously wipe out a mortgage.

(I am staunchly pro-buying vs. renting if you can swing it, but it is always worth remembering that the S&P has crushed the housing market over the past fifty years — it’s not even close. This is a both/and, not an either/or.)

After that, it becomes a very individualized case of prioritizing. I’d love to be able to stuff my kids’ 529 accounts with money for college, but I also want to pay a little extra each month toward the principal on our mortgage, and I want to keep investing money as often as I can. So I try to chip away at all of them rather than trying to do just one. It’s like the opposite of the debt snowball: call it the savings drip (not to be confused with a stock DRIP).

Point being, you’re going to have your own set of priorities for cash depending on dependents, debt, bills, mortgage, goals, and so on, but I would encourage you to pour out a little (couldn’t resist) on each one.

Photo by Anastasiia Krutota on Unsplash

LIQUID CASH

Short and sweet: artists and workers tend to SUCK at managing money, right? When we don’t have cash, we need it. When we do have cash, we blow it.

Next time you have some kind of windfall — or maybe you’ve just been better about setting aside some money and aren’t sure where to put it yet — remember that you have options: take advantage.

Ultimately, the single best thing you can do with cash you are holding is put it into Treasuries. But T-bills are a damn headache. So I would skip the cumbersome government website and instead park cash in a brokerage account where you can buy a fund of Treasuries that will allow you to earn a good return on cash in an easy and easily-accessible format. You can poke around and look at lists from places like this and this. There’s a slew of them out there; I prefer BIL:

• It pays 5% on an expense ratio of 0.14%.

• It’s government debt: Uncle Sam isn’t going to default on the loan.

• BIL is ultrashort-term (1-3 month bonds), so it won’t fluctuate the way long-term bonds will do.

• It will help you get (really can’t resist) paid in full.

Good luck out there.

Nico