Free Consult Friday: Should I invest my "extra money?" 08/18/2017Submitted by Jason Howell Company | Developing High-Net-Worth Families on August 18th, 2017
"Free Consultation Friday" calls are offered to the public by appointment, as a vehicle for getting that one answer to a financial question you've been too embarrassed to ask friends, family or even your current financial advisor. It is a pro-bono service of Jason Howell Company and we are proud to invest our time this way for the communities we serve. Calls cannot be considered "advice" in the legal sense because we have no agreement in place. Calls and are limited to about 20 minutes (one or two questions).
On this particular Friday I had a caller, an old friend actually, ask whether investing her extra money made sense. Even though these calls are not considered advice, I still wanted to walk through some due diligence when helping to answer her question. So I started asking a few important questions but the two most important were:
- Do you have any credit card debt?
- Do you have any emergency savings?
The answer to the first question was "Yes," to the tune of $8,000. And she was servicing that debt at a rate of 10% (interest). Her answer to the second question was also "Yes," but her savings totaled $1,500. These savings were in a regular savings account so though she didn't know the interest rate, we were confident the bank was paying well below 1%. This highlighted a key concept I typically share with my clients: don't be upside down with banks. Eloquent isn't it?
In this caller's example, she was paying 10% interest on a higher balance than the 1% interest she was earning on a lower balance. It's really hard to gain wealth when losing to banks on a foundational level. The first step in good financial planning is to get right side up with your banks. Pay down your credit cards - with the goal of paying them entirely off - and increase your savings. This way, you can earn more money (interest) from the bank than you pay to the bank. And that's when money starts "working" for you.
BOTTOM LINE: Should the caller invest her "extra" money?
In my opinion, no. The best course of action in a good financial plan is to first build up enough cash savings to cover at least three months worth of living expenses. Of course, if there's credit card debt, develop a plan for paying that down too. After you are "right side up" and still adding to savings, work with a financial planner to see if there are other gaps in your financial plan that need to be paid for. If not, then you're likely in the clear to begin an investment plan that takes into account your goals, time horizon and tolerance for risk.
Would you like to schedule a 20 minute Q&A appointment for an upcoming Free Consultation Friday? Just Contact Us.