First World Problems: 7 Things to Do with Excess Funds

On the surface level, having excess funds does not look like a problem. Businesses are meant to make money, and having so much of it only means that you are doing the right thing. Still, having excess funds sitting on your business books could be problematic. Being a valued resource; having capital means doing something productive with it. The same goes for individuals and employees in organizations.  If you have excess funds, it is imperative to put the money into good use. Here are seven things you can do with your excess funds:

  1. Pay Down Debt

The first option that comes to mind when you have excess funds in your account is to pay down your debts. That is the case because a short-term investment of the surplus cash will less likely yield returns that are equal or greater than the interest rate you are paying on your debts. It makes no sense, for instance, to invest your excess funds at 5 percent when you are in a position to pay down debt from your bank that is charging an interest rate of 12 percent. While that is the case, you also need to note that the decision to pay down your debt may not always be the right call.

One of the benefits of managing your cash flow is your ability to predict the number of funds your business may need in the future. That is, you should be in a position to ascertain if you will need to depend on external financing as the source of funds for your business. The need for external financing may resulting from your efforts to want to expand your business, purchase new equipment or property, or get you through that period when the business is down.

Irrespective of what the reason may be, preparing the cash flow budget is usually the best way to go about predicting the business’s future needs for cash. When such needs have been determined, you can now make decisions that will allow you to finance the needs in the best manner possible.

For instance, you may find that the rate of interest is relatively low at the moment, but you anticipate they are going to rise soon. Instead of utilizing the excess funds to pay down your two-year loan at 10 percent, it could be advantageous to invest the excess funds temporarily and avoid future higher interest rates.

  1. Individual or Commercial Growth

If you are an entrepreneur recording a healthy net profit, you could easily be tempted to reinvest at least some of the funds into your venture. The ultimate goal is to drive greater profitability in the future, irrespective of whether the money is used in reducing operational costs, underpinning strategic growth, or repaying debt in your business.

The important thing is to keep in mind the future as well as the real-time needs of your company, so you can ascertain if reinvestment is the right way to go. More significantly, you shouldn’t inject additional capital into the business just for the sake of it, especially if there are other pressing matters outside the venture. If your venture already has an established model with minimal debt, reinvesting may not be the best option. In such a case, it would be prudent to seek out alternative uses for excess funds.

One option you may want to consider is to invest in your financial growth. In this case, you can utilize the excess funds to establish a fiscal nest-egg for the unforeseeable future. This would be an important move as you will be in a position to create personal wealth during times of economic hardships while negating the effects of potential rising inflation and pension shortfalls.

In addition to that, this kind of strategy will help in creating an independent source of wealth which is completely separate from the business you are running. Therefore, this can be used during instances when your business encounters some financial hurdles or reinvested into the business in the future.

  1. Increase Your Retirement Contribution

Having some excess funds every month could be an indication that you are now in a position to divert more funds to your retirement account. An employee should have sufficient funds in their 401 (k) plans if they are to obtain any matching contribution from their employers. Nonetheless, investment experts sometimes advise saving more, up to fifteen percent of the pay, if one is in a position to do so. Workers who have not yet attained their target contribution rate may decide that their savings be automatically increased by a smaller percentage point (one to two percent).

Nevertheless, when putting your excess funds into your retirement account, you need to be certain that there is enough left to cater to expenses that may arise sooner. When it comes to making such important decisions, you always need to hold onto a safety net, so things don’t turn against you. If not, you may be easily tempted to start digging into your retirement accounts earlier than expected so you can cover your major expenses.

Looking for investment experts is always a good decision if you want to be confident that you’re making the right choices regarding your retirement contribution. When you have the right professionals by your side, you can rest assured that your money is in good hands in whatever investment choices you make.

  1. Open an IRA

Opening an Individual Retirement Account is the right move if your 401 (k) is already maxed out. With this option, you can make your contributions of up to $5,500 per annum, or $6,500 a year if you are at least 50 years of age. You need to note that the IRA deductions are usually limited for individuals and couples with access to a retirement account at their places of work. The Roth IRAs, with after-tax deductions, provide more flexibility for those who are uncertain of what to do with the money. Contributions are usually withdrawn any time. What’s more, investment earnings can be withdrawn without 10 percent tax deductions after at least five years of account opening and if the money withdrawn is used for the first-time home purchase, payment of certain medical expenses, or for qualified education expenses.

  1. Adjust Budget Allocations

Saving and settling your debts are fiscally responsible decisions, but these are not entirely fun. When you happen to have some excess funds, it is always nice to treat yourself as well. Whether you are earning more money regularly in the form of higher salaries or it’s just a one-time surplus, you’ll need to look at your budget to determine where the excess funds can go.

At the moment, are you exceeding your expenditure limits in certain areas of budget categories? In what areas do you feel deprived? Answering these questions could go a long way in helping to decide what to do with the surplus funds.

Maybe the budget for your meals has always been inadequate, and you would like to purchase that expensive wine and fancy cheese or perhaps you may want to add to your clothing or entertainment budgets. And while it is not a problem to indulge within reason, make sure you tame lifestyle inflation. At all times, living below your means will present a much better financial outcome.

  1. Search For Bargains

Most enterprises will have fluctuating expenses. For instance, a clothing retailer may be subject to fluctuation cotton prices or an electronic business may face changing costs for different gadgets. Such fluctuations, in most cases, can be extremely frustrating, especially when you have no option but to purchase the items to maintain your inventory.

With excess funds, you have the option of purchasing more than you require when the prices get historical low. When you do that, you’ll eliminate the need to purchase the items at higher prices in the future. As long as there is ample storage space, you can easily expand your margins significantly using this practice.

Of course, there is always a risk to it. Prices can sometimes be unpredictable, and you may increase your stock only for the prices to continue dropping. Therefore, when searching for deals, you need to be very picky about what it is you are buying.

  1. Invest in Growth

You can also explore other options for investing your excess funds. You could earn reliable interest on your money, or higher returns if you placed it in stocks and bonds. Holding onto your cash carries with it an opportunity cost since you will be sacrificing the potential cash flows from investing the money. You can also leverage other options such as acquiring another business. This could be your competitor’s business or a company in a related industry to maximize and diversify your earnings.

In addition to acquisitions, there are also other options you may want to consider. Acquiring new equipment, for instance, can decrease expenses in the long run and increase the efficiency of your business operations.

Bottom Line

It is easy for an individual or an entrepreneur to feel like spending their excess funds right away. This is a dangerous mindset as it could result in careless spending or value-destroying acquisitions. If you feel like the timing is not right, then better hold onto the funds. Better yet, you can contact the investment experts so you can be advised on what steps you can take.