How to Find the Best Place to Put Your Money

Should you put your money in the bank or use it to repay debt? Save or give? The choices are dizzying, but one wins out over the rest.

(This is part 2 of March Money Madness. In my last post, I wrote about the power of brackets to make hard money decisions easy. If you haven’t read it, go here to help this post make a lot more sense.)

First, allow me to summarize why brackets are such a powerful tool.

Brackets Are Good*.

Brackets—for lack of a better word—are good.

Brackets are right.

Brackets work.

Brackets clarify, cut through, and capture the essence of the evolutionary spirit.

Brackets, in their financial form, can aid the upward surge of your money.

And brackets—you mark my words—not only help you make decisions, but help you achieve your financial goals.

Brackets will help you make hard money decisions easy. And for the Average Joe or Jane, there is one choice that stands out.

Setting It Up

We looked at it from the perspective of the average American. According to Nerdwallet, here’s a profile of Average Joe / Jane.

  • Average Household Income: $75,591
  • Average Credit Card Balance: $16,748
  • Average Student Loans: $49,905
  • Average Savings Rate: 5%

(The average credit card and student loan balances are for households that have that type of debt. Since some households don’t have any credit card balances or student loans, Nerdwallet removed those households in those averages.)

Then we set up our 4 regions (investing, saving, giving, and spending) and narrowed down the field of 16 to an elite 8. They are:

  • Investing: Maxing out 401k vs. Investing in Yourself
  • Saving: Bank vs. CD
  • Giving: Organizations that Help the Needy or Research the Solve  Problems
  • Spending: Experience vs. Credit Cards

Now… let the games begin.

The Elite 8

Maxing out 401k vs. Investing in Yourself. If you contribute to your 401k, you get a guaranteed return in the form of tax savings. For example, if you’re in the 20% tax bracket, your starting return is 20%. In other words, even if your investments lose 15%, you’d still be up. This doesn’t even include any company match. It’s so powerful that if you maxed it out in your first post college job, you’d pretty much be a millionaire by the time you retire. (Hint: if the government is giving you a tax break, it means it’s really important to the government that you do this. Taxes and tax breaks are a tool for the government to collect money but also influence behavior).

Investing in your learning and skill development may be more powerful in the long run but the returns are probably months to years off. Max out your 401k and get the benefit today. Plus, you can rent a book from the library or use the Internet resources for free. Maxing out your 401k hits the game-winner with 4.01 seconds on the clock.

Bank vs CD: Let’s say you put your money in a CD, earning a sizzling 0.50%. The next week, your car needs a new catalytic converter. If you need to withdraw early from your CD, there will usually be penalties. Your spare money should be invested to grow, or set aside for emergencies. If you can’t take it out when you actually do have an emergency, you’ve missed the point—just like team CD. Bank wins.

Giving to Organizations that Help Needy vs. Research: Argh…this is tough. It’s like two defensive teams grinding it out. On one hand I believe in research. But my dollars may not amount to breakthrough for years (or ever). But if I give to organizations that help the needy, I know someone will be helped. And the difference here is that with an organization, they have the scale to help in larger ways. They also have people trained to help. Giving to organizations that help the needy wins on a buzzer beater, but research is researching the replay.

Spending on Experiences vs. Credit Cards: Experiences are great. Experiences while you have debt you can’t pay off is stressful. And sets you back. Plus, you can make your experiences free. Save the concert tickets for when they’re not adding to your credit card balance and go on a hike. Credit cards win in a route.

The Final Four

Bank vs 401k. The typical American has less than $500 for emergencies. If you don’t have cash and an emergency comes up, you will end up in more debt. So by investing without a cash buffer, you actually expose yourself to a lot of risk. Until you have at least 2 months of expenses, put it in the bank. In an upset, the Bank moves onto the championship game.

Giving vs Credit Card: Credit card debt means you’ve pledged your future income to pay for that thing you bought.  Therefore the cash isn’t really yours.  You have given unto Caesar what is Caesar’s. Or else. So what happens if you give away Caesars money without paying him first? You’ll be in more debt and pay penalties, which means you have less to give in the future.  Credit cards win again and it isn’t close.

So now we head to the championship: bank vs. credit cards.

And the Winner Is…

Credit cards. Say you’re putting away cash in the bank for an emergency but you’re not paying down your credit card bill. So since Average Joe or Jane has less than $500 for an when an emergency comes, they’d have to borrow more under credit to pay for their non emergency expenses anyway. So why not reduce that balance now to at least lessen the monthly payments?.

Everything plays into the game strategy of team credit card.  You used credit cards to help you consume, but if you’re not careful, they can consume you.  If you have credit card bills you can’t pay off every month, you should reorient your spending to focus on paying it off as soon as possible. Aggressively pay off this team of future 1st round draft picks. Make big credit card bills one and done.

 

Is this the outcome you expected?

This bracket isn’t to tell you that you need to put all of your money in that. It’s only meant to give you a sense of priorities. Realistically you’d allocate a larger portion to the champ, and some to the others of the final 4. If you’ve gotten to the point where you can pay off your credit card bill each month, then your runner up is the new winner. If life has changed for you, then re-run your bracket. It’s a good idea to run it every 5 years anyway, since your circumstances will probably have changed.

If you haven’t filled out your bracket yet, go here. They’re fun, easy, and a great way to help you make decisions!


*You may have guessed that this is a remix of the famous Gordon Gekko “Greed is Good” speech in Oliver Stone’s 1987 movie, Wall Street

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