Recently I was flattered by a request for “money advice” from a good friend. First, I must admit that I’m not a certified financial coach, advisor, or counselor. I’m just a guy who tries to use logic, reason, and common sense to manage money. Oh, and I wrote a book about it. Nevertheless, I wanted to share this exchange with my friend as these are common questions that many can relate to.
What to do with extra income
Friend: We’ve been blessed and are really thriving right now. We have a lot of extra income and are wondering what to do with it.
Me: While I don’t know your exact situation that’s awesome! We are so excited everything is going well!
First, the Dave Ramseys of the world are going to tell you to establish an emergency fund of 3-to-6 months of living expenses. Really, whatever you feel most comfortable with. This is what we are currently working on. So, let’s say you have 6 months of living expenses saved – open a savings account and put that money in there and don’t touch it – it’s an emergency fund.
What debt do you have?
Friend: We don’t have any credit card debt. We owe money in federal taxes from 2019, which was due in July. We already paid Georgia state taxes. My husband has student loan debt which we just refinanced. We also owe money on both our cars and our home mortgage. All the interest rates on the debts are less than 4%.
Me: It’s great that you don’t have credit card debt because interest rates are at an all-time high with most cards ranging between 20% and 30%, which is criminal. Whatever debt you have pay it off – highest interest rate first. For example, if you have a debt with an 8% interest rate and you pay it all off, it’s like paying yourself an 8% return, etc. But you mentioned none of your debt is over 4% interest – that’s very good.
You guys are doing great. And you really don’t need to worry about paying off the mortgage any quicker – even though some people might say otherwise – because there are tax breaks involved with having a mortgage, plus that debt is for an asset that is appreciating in value. Focus on the student and car loans first.
Friend: We are thinking of putting money towards the student loan debt because that is glaring when lenders look at us for leases and loans. We are in a position to pay down approximately one-third of that debt.
Me: Wow, that’s fantastic. If you have the means to knock out one-third of your current student loan debt, I say go for it!
Investing ideas
What about investing? I’d recommend opening an IRA with Charles Schwab (CS). I like CS because they have little to no junk fees. Mentors have told me that good investments are SPY which is an index fund that mirrors the S&P 500. Also, any of the Vanguard index funds are pretty good bets. Here is the list of index funds we researched. When it comes to stocks, I typically don’t like to pay more than $50 a share to start out. That way you have room for your investment to grow over time.
Friend: We have money invested in Edward Jones mutual funds in the stock market. We also have Simple IRAs with American Funds. A relative opened a 529 college savings plan for our child. With everything going on with the economy we don’t really want to invest anymore.
Free yourself from the bondage of debt
Me: I totally understand. It sounds like you’re doing a tremendous job with your investment plans. Bravo! You are way ahead of most Americans.
In summation, if you have enough cash to crush some or all of your debt, I would kill that off immediately. It will be quite liberating. Remember the powerful verse from Proverbs 22:7 which says: “The rich rules over the poor, and the borrower is the slave of the lender.”
Keep up the great work!
For more on my financial journey and thoughts from other unique individuals, check out my book Margin Matters: How to Live on a Simple Budget & Crush Debt Forever.