Home > Money > Liquidity Vs. Interest: The Battle for Your Buck

Liquidity Vs. Interest: The Battle for Your Buck

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Most adults have struggled with how to allocate their money. Actually, most adults do struggle with this. Where do we place our money? Should we save it? Should we put extra principal towards our car? What about our mortgage? Why the hell do I deal with this crap?

Eventually these internal (sometimes…) conversations end with depression, self-loathing and a much needed catch-up session with your good friend, Jim Bean (and possibly his best friends, Jack Daniels and Jose Cuervo). And as much as this site approves of imbibing in your favorite beverage, we prefer more appropriate circumstances (see: Drinking 101).

That’s where we come in. We’ve decided to give you some free financial advice (Remember, you get what you pay for) to help solve your financial dilemmas about where you should put your money. And please, let it be noted, I’m not a financial expert by any means…I just play one on TV.

1. Set Goals

This one seems obvious and easy, but it actually does require some sort of thought. However, once you know what to do, even the Geico caveman can do it (we really should be cashing in on all these corporate sponsorships). Your first step of step one (are you lost yet?) is two decide what you want as your “Rainy Day” fund. Most financial experts say that you always want to have savings worth two months of paychecks (Easy Math: Paycheck x 4). In these glorious economic times that we’re living in, I would recommend somewhere closer to three months (Paycheck x 6). But this also depends on your standard of living and your current salary. If you’re pulling down $80,000 (aka 80-grrr) a year but live in a 1,000 sq ft, $115,000 house and drive a Moped, you’re probably set at about three paychecks worth of savings.

The next thing you need to do is determine your value of liquidity. Meaning, how much do you value having cash available to you? I, the eternal pessimist, like to have more cash in the bank than most just because it has more functionality and usefulness (and determined value) than if I lost my job, got short on cash and was forced to sale my car instead of continue on with the payments. Cash allows you the freedom to keep paying your bills (and make rash decisions) if you encounter a rough situation. However, there are certain limits.

2. Pay off your credit cards

Credit cards are a very useful financial tool and can actually benefit you if you use them wisely; however, they also how the power to end your economic well-being if abused. Nine times out of ten, credit cards will feature the highest interest rate of any form of credit you have (mortgage, car loan, etc). If this is not the case for your credit portfolio, please quickly take a seminar on how to stop failing at life. The only reason your credit cards should have a lower interest rate than your mortgage is if they’re in the promotional 0.0% interest rate. Most times, credit cards will feature an interest rate 2 to 3 times higher than your mortgage (12-18% vs. 6%). Because of this, all extra cash should go towards eliminating your credit card bill.

If you have a $900 credit card bill with a 15% interest rate, the bank/lender will offer you a minimum payment of roughly $18 (2%). If you make just the minimum payments because you’d rather book a trip to Maui in November (it is beautiful during the fall), it will take you eight years to pay this bill off. You’ll end up paying over $600 in interest over those eight years, nearly doubling your amount due. And that’s only if you don’t use it again for the remaining time (which incidentally also hurts your credit).

3. Prioritize your loans

Now that you’ve reached your savings goal and paid off your credit cards (hint, hint), look over your other loans and decide which ones you want to apply all* your extra cash to. These loans will probably include a mortgage, car loan and possibly student loans or maybe a small business loan.

(* excludes extra savings goals such as travel, new TV, building a bar in your basement, because it is important to actually LIVE your life)

If you have student loans, I would recommend trying to pay these off first as even if you declare bankruptcy, you’re stuck with the bill on these little guys. After all, if you borrow money to go to school, shouldn’t you learn during that time how to earn an income and pay your bills (current depression excluded…to an extent)? Once/if these are not in the picture, the choice becomes a little harder. In most cases, your car loan rate will be higher, if only marginally, than your mortgage. Logic suggests that you pay your extra money to your car payment since you’ll be saving more in vanished interest. However, there’s an unparalleled gratification, not to be confused with self-gratification, that comes with your last mortgage payment. So this decision comes down to whether you see in black and white or stop and smile at the little, sentimental things in life.

If you have a small-business loan, put that on the backburner and use that interest to lower your taxable income, because lowering your taxes is one of those sweet joys in life. Plus, the business and personal finances shouldn’t overlap. On a side-note, it really doesn’t matter if you pay the interest or pay your taxes, the government will inevitably give the money to the banks, anyway, once they screw up again (Financial burn!).

4. Enjoy your life

All this eventually comes down to the old philosophical question: “If a life wasn’t lived, was it a life to begin with?” OK, that may not actually be an old philosophical question and more of something I pulled out of my sphincter, but nonetheless, it still has merit in this situation.

If you devote all your time to working so you can pay off bills and don’t go out and take part in the pleasures of life, you’ll grow to resent everything. Jack Nicholson once said it best, “All work and no play makes Jack a dull boy.” If you work hard and enjoy nothing, you’ll begin to hate all the things you work hard for. You work to pay your mortgage, so eventually, you’ll loathe your house. You put in extra hours to get rid of your car payment, then the stupid son of a *%&#$ won’t start in the winter. Everything you work so hard for, you begin to despise. So please, for yourself, and possibly everyone on your route if you work for the postal service, take time for yourself, spend money (responsibly) and enjoy your life to the fullest extent. Just don’t go sending the U.S. into another one of these $*%&ing depressions!

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