Strategize Your Finances: Put Your Cash Where It Counts
Having more income than you spend feels good, yet it’s crucial for us to recognize that this is, in fact, necessary. If you ever want to spend any time without income in your life – whether it’s retirement, a sabbatical, or whatever – then you must earn more than you spend.
But that’s not enough! You also need to make sure your extra cash has the appropriate job.
Some of your money has the job of growing. This is your Long-Term Portfolio and consists of any money you don’t need for at least 3-5 years.
Some of your money has the job of simply being there. This is your Savings Target and consists of your Emergency Fund and your Cash Needs.
Once you know your Savings Target, that amount should be placed in your savings account. You could use an online High Yield savings account if you prefer, but make sure your balances are FDIC insured and readily available if you need them.
You’ll also want some money in your checking account to pay the regular bills. I suggest keeping one month of your regular expenses in checking. This way, you’ll be sure to always have enough money to pay your bills whenever you decide to sit down and do that.
Calculating Your Savings Target and Building Wealth
Before doing any of this, you need to have a good understanding of your Living Expenses so you can calculate your Savings Target and the amount to keep in your checking account. Over time, as you continue to receive paychecks into your checking account, any amounts exceeding one month’s worth of regular expenses should be transferred out of your checking account.
First, see if your savings account balance equals your Savings Target. If you don’t have enough, top it off with your extra cash. Then once you have met your Savings Target, move any amount over to your Long-Term Portfolio and get that money working for you.