If you are sitting on a significant amount of cash, you might be wondering what to do with savings now. Interest rates are so low that it’s easy to get complacent and not put much thought into the issue. Here’s an e-mail I received from an interested reader, “N”:
I have $20,000 in savings and I’m not sure what to do with it. I have $6,000 in student loans and no credit card debt. My car is from 2001 and may need replacing in the next few years. I have no children and I’m not sure if I should pay down my debt, keep some in savings, invest some etc… Do you have any suggestions for me?
I was delighted to get this question because my sense is that lots of people struggle with similar dilemmas. As is often the case, the question N asked was important, but she really should have been asking other questions as well. First, to the advice.
First Things First
My suggestions were for N to pay off the student loans and put aside some money for the car she’d need to buy soon. (This, by the way, is a great example of why I am very much against sending kids to expensive college.) I also suggested that she buy a used car and not take out a car loan. I figured that would eat up most of the $20,000 right there. I next suggested that she force herself to put aside a certain amount each month for savings. Eventually, she’ll want to start saving money for a house too, but we weren’t there yet.
Because N doesn’t have any credit card debt, we know that she isn’t an over-spender. But in order for N to get to the next level, she needs to focus on two things:
a. She needs to implement a budget-tracking system.
b. She needs to have a financial plan.
If you’re a regular reader, you already know that I think everyone should track their spending and have a financial plan. Trying to navigate your financial life without these two tools is like trying to sail a ship without a rudder or sails. You won’t get far and even if you do, it won’t be where you intended to go.
Budget tracking will allow her to see where her money is going. Most people don’t really know what it costs them to live, and if that describes you, it’s something you need to fix. If you track your monthly spending, you’ll know exactly what it costs you to live. And if you know what it costs you to live, you can very easily make slight changes that will result in huge advances.
A financial plan sets out a clear path for your future. You lay out where you want to be and what you need to do in order to get there.
N asked about what to do with her savings. That was a good question. But why stop there? Sure, that’s her immediate need. But I find that many people focus on the short-term question at hand when the bigger issues go unaddressed.
What other advice would you give N?