This question came from the HTM Facebook group recently. Alexander wrote…
“My wife completed the 100 Envelope Challenge and now we have $5,050 sitting in cash. We really don’t have a set goal in mind for it. What would be the best use/destination for this $?
We owe about $10k on her car and about the same on our roof and the rates are 5.2 and 6 and change, respectively. Should we pay down debt, find a high-yield savings account, or put it into the market into SPY, or VTI? I’d love a little direction or advice to get us going.”
Matt & Joel’s response: First off, this is awesome! The 100 envelope challenge is unique because you’re pulling a random envelope that determines how much you’re gonna save ($1-$100) every day. You’ll ultimately stash $5k over the course of 100 days! Which is a big chunk of change.
That is the hard part, the actual savings portion. What should you do with it afterward is typically the easier question to answer. Because any of the options you mentioned is a step in the right direction for financial progress. Let’s run through all those options…
Emergency Fund inside a HYSA
The first option worth mentioning is opening a HYSA – High Yield Savings Account. This is the right choice if you feel like your e-fund is insufficient. Having emergency cash on hand will prevent you from going into debt should a disaster pop up.
Interest rates for savings accounts are also pretty sweet right now, in the ballpark of 5%! The bank we use, CIT Bank, has no fees, is FDIC-insured, and you can access that cash any time you need it. That’s a stellar option.
The peace of mind that comes from a fully stocked e-fund is clutch. So that’s priority #1.
Debt Paydown
The reason we didn’t put debt paydown as option #1 is because both your car loan and roof debt interest rates aren’t egregious. You’ll definitely want to get rid of these loans eventually, but they’re not as horrible as high-interest credit card debt.
Investing vs. paying off debt is a common conundrum many people deal with. And it’s not always clear-cut.
From a psychological perspective (and to avoid paying interest that pays more than your savings account), we’d love to see you pay off those debts before investing.
The only option that might trump this is if you haven’t contributed to your Roth IRA this year. But if you’re already gonna hit that goal, we’d suggest putting this $5k towards the roof debt.
Investing for Retirement
It’s no secret Roth IRAs are our favorite investment accounts. But if you or your wife have access to a 401k, you might consider bumping up your salary contributions and using that $5k in cash to cover the difference in your paycheck.
Plain ol’ brokerage accounts are always an option, but prioritizing those tax-advantaged accounts gets you further in the long run.
You mentioned index funds, and yes, we recommend investing in those highly diversified index funds with a low expense ratio. No matter which account you invest within, index funds are the way to go. Here’s a cheat sheet of our favorite index funds:
More Money Savings Challenges
We’re all about using savings challenges to your advantage to put away extra cash. Gamifying money can add some fun and added motivation to reach your money goals.
Here are a few others you might want to try next:
- 52 Week Savings Challenge: Save $1,400 with very little effort. Also, you can try this in reverse, or random order!
- Sell Your Stuff Challenge: Try to save $5,000 in a single year by selling your old stuff online.
- Pantry Challenge: Don’t go shopping, and get creative only using all the old stuff in your pantry.
- No Eating Out Challenge: Try cooking at home for 30 days, and pocket all those savings you would have spent on restaurants and fast food.
It’s amazing how gamification can be successfully applied to saving money. So glad it’s worked out for you and your wife, and we hope you’ve inspired others to take on a challenge too!
The Bottom Line:
Congrats on saving that extra $5,050 in cash! This is the perfect opportunity to top up your emergency fund, keeping it tucked away in a HYSA. If you’re already on top of that, we’d recommend slapping that $5k down on your pesky roof debt as the next option.
If you do want to prioritize investing, that’s OK too! Putting the money into tax-advantaged accounts first (Roth, 401k, etc.) is another high-priority action. And of course, buying broad index funds will give that aggressive growth over the long term.
No matter which route you choose, congrats again for saving that $5k. Now it’s time to pick another challenge to try, rinse and repeat!
For the full version of this discussion, check out Podcast Episode #871 (it’s the last question in the episode)
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