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What should I do with the extra money in my checking account?

Hi Pete,

I need advice how to use excess money (5-15k), currently in our checking account. What’s the best use?

  1. New car downpayment?
  2. Paying down student loans? (70k)
  3. Paying principal on current home?

Thanks, Greg

Hey Greg,

Thanks for the question. I’ve talked about the checking account buffer a lot lately. It definitely causes higher spending so I’m glad you’re getting smart about your buffer. And $5,000-$15,000 is a significant buffer.

Before I get into the advice portion of this answer, let me just reiterate how a checking account buffer can damage your financial life. We’ll go with pants as an example. Greg, for this example you are super into pants, like nice fancy slacks-pants. You see a pair you want and they are $190. With $5,000 or more in your checking account there is no reason for you to feel bad about this purchase, so you’ll likely buy them. But if you remove the excess money and keep your checking account in $1,000 range, you’re much less likely to buy those unnecessary fancy pants.

Here are the steps you need to take to get rid of your checking account balance:

1) Get the excess money out of your account. Now.

2) Do you have an emergency fund? If not, the money goes in your emergency fund, end of story. But if you already have a fully funded emergency fund, then you can move on to the next step.

3) Do you really need a new car? If so, you can use the money as a down payment on car (get a used one).

4) If you have no other debt and your emergency fund is full, sure you can use the money to start making extra payments toward your student loan, but if you end up buying a car I’d much rather you focus on paying that off first.

5) Do not pay extra on your mortgage right now, you have other smaller debts you should focus on first.

6) This isn’t really a sixth option, but I got into the number-vibe so just go with it. We all have a lot of financial goals we need to accomplish at any given time. Just like our debts, we want to “slap” at our goals, but it just won’t work. You have to learn how to mono-task. Pick one debt/goal/obligation and work toward accomplishing it. Then move on to the next one.