How to spend emergency surplus

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Dear Debt Adviser,
My emergency fund is in a money market account with more than eight months of savings. What do you suggest I do with the extra money? Do I keep it in the money market account currently earning a 1.74 annual percentage yield or should I put all monies that eclipse eight months of living expenses into a short-term certificate of deposit or what?
— Cheryl

Dear Cheryl,
First of all, congratulations for living below your means and needing to ask advice about what to do with discretionary money. And second, thank you for asking me a nondebt question for a change! If you continue to manage your finances in this way, you will be way ahead of the game and much less likely to experience financial problems down the road. Keep in mind, we all have bumps in our financial journeys, but it is hoped that your emergency fund will provide you with the cushion you need to avoid a crash.

I wouldn’t be the Debt Adviser if I didn’t take a few moments to discuss any debt you may have. If you have any credit card debt, consider using some of your extra money to pay down the balances before you do anything else. It’s fine to keep the credit card accounts open after paying them off, but use them moving forward only when you have a plan in place to pay off the balances in full in a set amount of time.

After you pay off any debt you may have, I suggest you interview several Certified Financial Planners and find one that you are most comfortable with. Feel free to ask them any questions you want. They are applying for a job with you, not the other way around! You can ask for their experience, results, references and where they went to school as well as what they suggest you do with your money. You should be especially sure to listen to determine how interested they are in you, not just your money.

A good planner will want to know all about your needs, goals and concerns before he does anything. Whether you decide to work with a planner, you will learn something in the search process about where you might best put your money. Either choice that you mentioned is low risk and very safe as long as you look for federal insurance on your deposit.

You do not mention your age or how much money you have saved, but eight months of expenses could easily be between $20,000 and $60,000 for many people. This isn’t enough to invest in a hedge fund, but it is a fabulous start on the road to financial independence and one of which you should be justly proud.

To protect yourself and your nest egg, I suggest you take a look at your insurance coverage to ensure that you have all the major aspects of your life protected from events that could drain your bank account. Uncovered major medical expenses cause thousands of people each year to file for bankruptcy, so adequate medical and disability insurance is a must. Homeowners, renters and auto insurance needs should be reviewed for adequacy as well. If you are middle-aged or older, it might be worth at least checking on long-term care insurance, depending on your family history.

Also, now that your emergency account is filled, be sure you are maximizing any IRA– or 401(k)-type opportunities you have. Finally, don’t be afraid to spend some of the money. As long as you have planned ahead to cover the expense, consider traveling or otherwise treating yourself. I am a strong believer in enjoying your financial success. You have earned the money, managed it carefully and deserve to be rewarded every now and then. As a bonus, due to our consumer-driven economy, your wise spending will be helping your country.

Good luck!

Read more Debt Adviser columns and more stories about debt management.