What Should You Do With Money After Your Expenses Paid?Oct 12, 2023
6 months of expenses saved can be life-changing.
With roughly 50% of Americans only a $1,000-emergency away from financial crisis, having a safety net is critical for your peace of mind.
And if you're one of the 85% unengaged at work and looking for a way out – banking 6 months of expenses can be your ticket out.
So after your monthly expenses are covered, here's a plan to get you on your way to financial comfort, whether you're starting in debt, or with padding in your savings account already.
Here we go...
What should you do with money after your expenses are paid?
Table of Contents:
It depends on your starting point. What I suggest is summed in my 'order of operations':
1. Pay down debt
2. Build 6 months cash savings
3. Then, and only then – begin investing.
#1. Pay down debt
Debt can feel like an anchor.
I remember when I wanted to leave my corporate job, I worried how I would handle those pesky student loans. I had about $40k when I graduated, and was stressed about shelling out over $500 per month for what seemed my entire adult life.
I wanted to get out this never-ending financial hole as quickly as I could. And paying the minimum wasn't enough. I wanted these gone. ASAP.
Here's the two ways I had to choose from, and after walking through how each way works, I'll share why I chose the one I did.
I'm unsure why snow-related names.. but there is the Snowball and Avalanche methods. Here’s how they work.
The basic premise:
- Allocate a (constant) debt repayment amount each month.
- Pay off ‘targeted’ piece first (lowest balance (Snowball), or highest interest rate (Avalanche)).
- That piece’s monthly payment is then used to increase the payment for the next piece.
Let's add some pieces of debt here to make it real. For each, we'll need the balance, rate, monthly payment:
- Car loan ($6,000, 6%, $200)
- Credit card ($10,000, 18%, $400)
- Student loan ($20,000, 3%, $300)
You want to pay down faster so you’ve allocated $1,000 a month towards debt paydown (an extra $100 over payment total of $900 as shown here).
Using this method, your payments look like this:
- $300 to car loan
- $400 to credit card
- $300 to student loan.
Notice the $300 towards the car loan is higher than the minimum as this is the 'targeted' piece in the Snowball method – the one with the lowest balance.
Maintain this schedule until the car loan is paid off.
Once paid off, that $300 that went towards the car loan – gets tacked on the credit card payment.
So now, you’re paying $700 per month towards your credit card, until it’s paid off.
And finally, $1,000 per month paid toward the student loan until it’s paid off.
And you’re debt free.
Exact same concept, but instead of ‘attacking’ the lowest balance loan first – you pay down the highest interest loan first.
In our example, the payments start off like this:
- $500 to credit card
- $200 to car loan
- $300 to student loans
After the credit card balance is paid off first (highest rate), the $500 (remember the extra $100 you earmarked for debt paydown!) from the credit card balance would be tacked on to the car loan (next highest rate), with the lowest rate piece, the student loan, being paid off last.
My preference? The Snowball Method.
It allows you to celebrate ‘wins’ along the way, and will most likely result in paying down a piece of debt quicker – creating progress. And nothing is more addicting than progress.
Especially when you can see financial freedom getting closer.
#2. Build 6 months of cash savings
Now that you're out of debt, let's get to work on savings.
If you're unhappy in your job, having a cushion can be the difference between you taking a risk on something that excites you. OR – saying another 25+ years in a soul-sucking career.
And before I get to how to save the cash, I'll say this:
If you don’t have 6 months of expenses in cash savings, skip some (or ALL) of these to get there:
- Living solo
- Car leases
- New clothes
- Gym membership
- Window shopping
But picture your money sitch if you do this for 1 year.
Here's a question to start:
Within a few hundred bucks, do you know how much you spend each month?
Most don't. And here's where I'd start to find out your spending, and cut the unnecessary to get that 6 months of savings faster:
Here's where I'd start in becoming aware of what your expenses are right now
1/ Review your expenses
Download the last 3 months from your bank and/or credit card and actually SEE where your money is going.
For a free spreadsheet to help you categorize, you can download my Master Your Money tracker here.
2/ Split into Fixed and Variable.
Fixed: ones you can't change (without a lot of effort) like rent, utilities, transportation, and food. Variable: ones you can cut and still survive. Basically everything else.
3/ Split Variable expenses further.
Into 2 buckets:
Happy Spends: 2-4 spends that make you HAPPY. That you love spending on. Could be a daily coffee. Your gym membership. A weekly spa treatment. Your car. Identify these, and keep spending on these.
Crappy spends: everything outside of your 2-4 Happy Spends. These are 'nice', but upon further review, don't do much for your happiness.
Be RUTHLESS in cutting these.
4/ Calculate NEW monthly spend target.
If you weren't able to cut at least a few hundred dollars – keep looking. Here's a few suggestions to try:
1/ Avoid new cars: $150 / month
Average monthly payment for a new car: $667.
Average monthly payment for a used car: $515.
Bonus: buy a ten-year old car, pay it off, and drive with NO car payment.
2/ Meal prep: $100 / month
Eating out less, and buying lunch on the fly can probably save you MORE than $100 per month - especially if you live in a city. Invest in a few solid containers, cook in bulk twice a week. Save money AND eat healthier. Win-win.
3/ Cut cable television: $100 / month
I’m SHOCKED at the number of people who still pay for this. 500 channels, with nothing on. Get Netflix and Hulu, watch what you want, when you want. Use that money AND time for something else.
4/ Exercise outside: $50 / month
This could be even higher, depending on where you live. Yes, it may get cold where you are, but you know what - dress warmer. And toughen up. Or as David Goggins would say - ‘Stay hard!’
5/ Cut your own hair: $40 / month
I haven’t paid for a haircut in almost three years. That’s over $1,000 saved. Turns out my $100 clippers have been my best investment ever. I know, may not be for everyone.
6/ Manage subscriptions: $60 / month
The average American household spends over $200 a month on subscriptions. Scrape through yours and see if you can find one or two that aren’t necessary anymore.
And another consideration to build that savings quickly..
Simplify your lifestyle
Detach your happiness from things / purchases by keeping this in mind:
The joy of material purchases is in the anticipation, and is fleeting.
Ever notice that? You're excited to buy something. You incessantly look it up before making the purchase. Then you anxiously await for Amazon to show up and deliver it.
Then what? It just becomes the new normal. Excitement gone.
Well this happens with EVERY purchase.
Two things I focus on:
1/ Not making any new purchases.
If I must, I follow these rules:
- No walking in stores without a purpose or list
- Wait two weeks before buying anything (excluding food, obvi)
- If I MUST buy the thing, something I own must go. 1 in → 1 out.
2/ Pare down what you have.
Pick a small area in your room. Can be a closet. Even a drawer. If you have a storage unit – we can't be friends...
Clear out anything in there you haven't touched in 6 months.
Let the lightness and excitement build and carry you to other areas of your home.
Experience the joy of filling garbage bags of things that were taking up your valuable space for NO apparent reason.
You don't have to go as extreme as I did when I went through this exercise (my friends when they came over: "did you just move in?"), but this will help you see how much you actually need... versus what you just accumulated.
Sure, it's common sense. But it's much more difficult to put into practice. You'll see when you go to get rid of that sweater you bought 3 years ago and wore once.
You've been warned.
OK, so now that you've hit your 6 months savings goal....
#3. Begin investing
I like to keep things simple. Including my investing strategy.
- I don't day trade
- I'm not a landlord
- I don't know shit about crypto.
But I do know that once crypto went 'sideways' – I got a LOT less messages 'guaranteeing' me a 450% return in a few days.
Everyone's a great trader in a bull market.
Now, I'm not a financial advisor or investing expert. But this is what I've accumulated from my 10+ years working in finance.
So this is NOT investment advice. This is what I do. If this inspires you to do something similar, I'd strongly suggest you do your own homework first.
Here we go..
What do I invest in?
I buy and hold exchange-traded funds. Or pools of company shares mashed into one easily buyable share.
If I want to buy – I click a button. If I want to sell – I click a button. In other words, liquidity ¬– or how fast an asset can be turned into cash.
It's one of the reasons I avoid real estate. It's a costly, time-consuming buy / sell process. I need to hire someone and potentially wait months to turn my asset into cash.
Now, I'm sacrificing the most important benefit of real estate ownership: leverage.
You can buy a $1,000,000 asset with $50,000 of your own cash.
If you want to buy $1,000,000 in equities – you need $1,000,000 in cash. Unless you purchase on margin. Basically a mortgage for equities, but way riskier. And beyond the scope of this post.
When should I start investing?
Short answer: only after you've completed steps 1 and 2: paid off all your debt and reached 6 months of living expenses saved. In cash.
Ideally, ALL debt. But I know that's not always realistic.
So let's drill down more into debt. Some types of debt I'd ignore, and invest before paying off, like a mortgage or student loans.
But others, like a car loan or worse, credit card debt – I'd highly suggest paying off before investing.
The simple reason is this:
Never invest what you can't afford to lose.
Investing is not a guarantee. Especially equities. There is always a risk of your money going to zero (in which case, we have way bigger problems – like the world is collapsing!).
But shouldn't I put all my money to work for me as soon as possible?
Yes. But not what you can't afford to lose.
If you have $30,000 as your emergency fund. Your life savings. And it's subject to market fluctuations, it's possible it loses lots of value in a short amount of time.
Remember covid? $30,000 invested in the markets turned to $15,000 virtually overnight.
If this is your emergency money, this is enough to toss you into a panic.
Cash is much safer. Immune to market swings, but at risk for inflation, or the rising prices of all goods and services. So the amount you can buy with your money is slowly eroded over time.
But it's much slower than market downsides.
And that's a risk I'd take with my first line of defense against unexpected expenses. Or job loss.
What should I buy?
Short answer: the entire market.
And how do you do that? Through exchange-traded funds, or ETFs.
Instead of being subject to the performance risk of one company, you diversify, or spread your risk across ALL the companies.
So if any particular one does poorly, it doesn't affect your holdings as much.
Now this is also capped on the positive side too. So what you're left with, at least historically, is that the entire market grows anywhere from 7-10% per year. And has done historically for the last century.
This doesn't mean that if you invest $1,000 now, that you'll have $1,100 next year. Then $1,210 the year after. If only it were that easy...
No, you may have $1,500 next year. Then $1,100 the year after that. Then $800 the year after.
It's erratic. But if you buy and hold for a long period of time, like decades, your money is likely to look like it grew a smooth 10% per year.
But it's not a smooth ride.
So this is why we 'set it and forget it'. Buy something now, hold it as long as you can – and let compounding work its magic.
In case you need more evidence why buying the whole market vs. individual stocks is a perfectly fine strategy, it's this:
Less than 10% of all 8,000 or so professional money managers will beat the market return rate over a 5-year period.
What does that mean?
That if you buy the entire market and accept its 10% average annual return – you will beat the vast majority of professional money managers over a 5-year period.
The same ones that charge you 1-3% of your total assets per year with hopes of getting you returns higher than 10%.
That's right – well over 90% of them will FAIL to achieve this. But will still charge you hundreds or thousands each year.
If these managers, with all the smartest people and the best tools can't beat the market returns – what makes you think YOU can?
I'm smarter than to think I can. So I'll buy the whole market. Then set it and forget it.
When should I buy?
"I saw we're in a 'bear' market right now, so I'll wait until things are better to start investing."
Horrible move. No one, and I mean NO ONE can time the market.
In fact, those that try often end up with WORSE returns than those that invest consistent amounts at regular time intervals (i.e., monthly, quarterly, etc.).
It's called dollar-cost averaging.
Sometimes you'll buy when prices are low. And sometimes you'll buy when prices look really high.
But overall, this will all average out AND you'll never miss the best-performing market days.
So find an amount you can afford and invest that amount at regular time intervals.
Here's some tickers to check out:
Go get yourself a brokerage account (I use Charles Schwab) and start with any one of these:
- VT: Vanguard Global stocks
- VTI: Vanguard US stocks
- VOO: S&P 500 stocks
And there you have it.
We've walked through exactly what I'd do after paying all my monthly expenses.
It's always comforting to have a cushion, whether you want to leave your job or not.
Because getting a good night's sleep is always in style. And knowing you can stay afloat when hit with unexpected expenses is a great way to keep stress levels low.