Read These 4 Simple Investment Strategies Before You Invest That Extra Cash

As a homeowner, how do you decide what to do with extra cash to improve your financial situation? I ask people about this all the time, and few are confident in their answer. Often, they settled on a plan pretty randomly, based on what they may have heard from friends or family.

So, I want to break down my own order of priority, which I’m hoping can help you think about this tricky question. I follow this whether I’m setting aside $200/mo, have an extra $100, or received a larger, one-time windfall (e.g., a tax refund or bonus).

Pay off any high-interest debt

For most people, this is just their credit card debt, which averages ~20%. Auto loan, student loan and mortgage interest rates are usually much lower than this (<5%). As I’ve mentioned before, the average return of the stock market is 10.5% per year. So, over the long term, you’re better off if you prioritize paying off only high-interest debt and keep more money available for other, more productive uses of cash. If you have multiple, high-interest debts, I’m a big advocate of paying off the highest interest debts first (aka the debt avalanche method). It’s the cheapest, fastest way to financial independence.

Fund a home maintenance savings or a general emergency fund

Home maintenance and other emergencies are inevitable and, if you don’t have money set aside to cover them, you’ll likely end up with high-interest credit card debt. A good rule of thumb is to have saved at least 1% of the value of your home for maintenance and 3-6 months worth of living expenses for general emergencies. Put this money in a separate, interest-bearing account at a different bank from your regular checking account to help you resist the urgent to access it.

Contribute to 401k or IRA retirement accounts

These retirement accounts have special tax benefits that make them even better at building wealth than other types of investments. Also, because of compounding interest, the earlier you start contributing the more time your money has to multiply. I wish I could go back and tell this to my 25 year old self.

If you’ll help pay for a child’s college, contribute to a 529 account

Like 401k and IRA accounts, a 529 account has certain tax advantages. That means you could cover up to 20% more educational expenses for your child with a 529 than with a traditional account.

After these, only then do I consider other investments.

I usually start with a traditional, diversified asset portfolio (stocks, bonds, real estate, etc.) — I’m a big fan of Wealthfront and other robo-advisors that do this automatically for you. You might also consider buying another property, or directly buying stocks or mutual funds. Or, you might choose crypto, a small business a friend is starting, or another alternative investment.

But — you’ll notice that nowhere on this list do I pay extra principal on my mortgage. 🙂 That’s because my mortgage interest rate is just 3.00% and all of options listed above offer a better return on investment than that. 3.00% is effectively free money. And, if I ever did need to pay off my home, I could use my other investments.

At House Numbers, these are the questions our product helps answer based on your unique goals and financial situation. We believe most homeowners need a better home wealth management solution.

Disclaimer: The above is provided for informational purposes only and should not be considered tax, savings, financial, or legal advice. All information shown here is for illustrative purpose only and the author is not making a recommendation of any particular product over another. All views and opinions expressed in this post belong to the author.