* This article was originally published on Sept. 2, 2020. It has been updated for 2021.

You’re living within your means, taking care of your responsibilities, and building your career. You might not recognize it at first, but the amount of cash in your checking account starts to increase. Month after month, it grows. All of a sudden, you’ve got a nice chunk of change sitting there. 

You don’t plan to spend it. So what do you do with it?

Pause: Why the Cash Surplus?

While cash can build up for organic reasons, like earning a higher salary but maintaining the same costs of living — aka savings creep — that may not always be the case. You might have to investigate if you’ve inadvertently skipped a recurring transaction, like an automatic payment. The chance of having “lost” a payment that could be leading to an excess of cash makes it important to review what’s changed. You may be missing something — as opposed to truly having “extra” cash.

Here’s a list of questions you can ask yourself as you check on the “why” behind your cash surplus:

▶︎ Are payments I was previously making no longer being charged to my account(s)? Should they be?
▶︎ Has my level of income or spending changed significantly? What’s behind it?
▶︎ Do I have a cash surplus but also increasing debt due to high interest rates?

It’s also a great chance to revisit areas that could disrupt your cash-flow plan in the future and protect against them. You can ask yourself:

• • • • Do I have the appropriate amount in my emergency fund?
      • Is my risk management plan in place?
        • • Do I have auto insurance … but with low coverage limits and a low deductible?
          • What about my homeowners or similar insurance policy?
          • Do I have a need for life insurance but no policy in place?
          • What about a disability insurance policy in case I couldn’t work temporarily or at all?
          • Could I use my surplus cash as a tool for obtaining or adjusting coverage to better manage these risks?

If you’ve gone through the questions above as well as some of your own and don’t seem to be missing anything, you’ve likely got a tried-and-true cash surplus! And that brings us back to the titular question: What should you do with it? Surely there’s got to be something better than letting it sit in your checking or savings account, right? 

Well, that depends on when you plan to use it.

Short Term: Let It Be

Is that “when” in the next 18 months? If so, it may be a good idea to keep it liquid — aka available and sitting in cash — just in case. It could come in handy if an opportunity presents itself earlier than you were expecting, like a sale on the washer-dryer combo you’ve been eyeing to replace your 20-year-old units. And knowing you’ll need it rather soon, you’ll likely want to protect it from investment risk so you don’t lose all or a portion of it to a drop in the financial markets.

▶︎ Pro Tip: If you’re looking to use the funds later but still within 18 months, here’s one way you might make it work for you, at least a bit: Find a high-interest-rate savings account, and you may earn half a percentage point or so. You can use sites like Nerdwallet and Bankrate to research an appropriate high-yield savings account.

And if you have a large purchase coming up in the short term, this can be a great time to plan a little in advance. Rather than financing the purchase, you can continue to save in your checking or savings. Then you can pay for your next big purchase out of cash flow — rather than paying another person or institution to loan you the funds. Or you could use your excess cash as a larger down payment to reduce your monthly repayment amounts — and hopefully decrease your interest rate, too. After all, a penny saved from avoiding interest is a penny earned!

Medium Term: Invest It

If you’re a couple years away from using the money — or you’re just not sure what you’ll use it for or when — investing your cash surplus could be an opportunity to see it grow more quickly.  We can help you build a portfolio that fits your appetite for risk as well as your time horizon. With the correct positioning and guidance along the way, you can make the most of your money and have access to it when you need it.

Long-Term: Take (Tax) Advantage

Are you in it for the long term and wanting to maximize your savings? Get ready to save with intent — and reap the tax advantages! A little savvy saving can go a long way toward financial independence. 

It all starts with taking advantage of the savviest saving spots. As you go down the list, in this order, if you don’t have access to one area, simply move to the next. If you have access, invest up to the max before you move to the next in the list. And keep in mind that these are only general guidelines. We can tailor them to your unique needs as you make your stash of cash work harder for you.

1. Get the (free) money. Invest up to your employer’s match in your employer-sponsored retirement plan.

2. Protect your health. If you’re on a high-deductible health plan and eligible to open a health savings account (HSA), you can set aside $3,600 as an individual in 2021 or $7,200 for yourself and your family.

3. Stash it tax-free … If you’re eligible to contribute to a Roth IRA, you can contribute $6,000 in 2021. Those age 50 and better can contribute an extra $1,000 for a total of $7,000.

4. … or in a tax-advantaged manner. Not eligible for a Roth IRA? You can contribute the same amounts mentioned above to a traditional IRA in 2020 — or take it a step further with a backdoor Roth contribution. Keep in mind your maximum combined contribution to a Roth IRA and a traditional IRA in 2020 is $6,000 if you’re under age 50 and $7,000 if you’re 50 or older.

5. Still have room to save? Head back to your employer-sponsored retirement plan and invest to the max. Although you won’t receive an employer match on these contributions, these plans offer tax-advantaged growth.

You might have decided on your initial game plan, but don’t forget to let us know about your strategy. We’ll be your guide as you continue to manage adding to and/or using this cash surplus. And we can keep our eyes out for other opportunities or to make you aware of potential blind spots in your plan. For some, receiving guidance and validation on how to manage money can be the key to creating more!

All said, making the best use of a cash surplus doesn’t have to be difficult. It can simply involve shifting your money mindset. Instead of letting the cash build up in your checking, would it be better to instead direct more pre-tax dollars to your 401(k) or similar employer-sponsored plan for the long term? Might it be better to simply change the location of the funds from your checking account to your HSA or Roth IRA? Or is that shift your chance to allow yourself to spend some of the surplus? 

Sometimes, you’ve just got to treat yourself!