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What To Do With Your Cash Flow: Save, Spend, Invest, or Pay Down Debt? Thumbnail

What To Do With Your Cash Flow: Save, Spend, Invest, or Pay Down Debt?

Think of your cash flow (income minus taxes and other fixed expenses) as a pitcher of water and the various uses of cash (saving, investing, paying down debt, and spending) as cups. You have a limited amount of water and you can’t fill all the cups, so you must choose how much to pour into each, knowing that more water in one cup means less in another cup. Finding the “right” balance is a function of both financial and qualitative factors, and it varies depending on the individual.

While it’s easy to become overwhelmed when thinking about how to correctly prioritize your cash flow, know that if you are “paying yourself first,” by doing some combination of saving, investing, and paying down debt, you are already taking a step in the right direction. Also remember that cash flow allocation does not have to be a rigid process or an exact science. It’s fluid and can change year-to-year as your priorities change. With that in mind, here are some thoughts to consider as you strive to find the balance that’s right for you.

Investing Versus Paying Down Debt

“Should I invest or pay down debt?” This is the first question we typically hear, particularly from younger physicians. On the face of it, the answer seems straightforward. If you are paying 4% on your debt, but can earn 7% by investing, then you should invest the money, right? In theory, yes, however no one has a crystal ball that tells them what their investments will earn each year. That said, if you are paying a 4% interest rate on your debt, you are guaranteed a 4% return simply by paying it down. The higher the interest rate, the more sense it makes to pay back debt faster. While we have a reasonable expectation (based on history) that stocks will earn ~10% and bonds will earn ~5% over the long-term, these returns are not guaranteed, and especially not over shorter periods of time. In other words, while you can expect to earn a higher return on your money over time by investing (barring very high interest rate debt, such as credit cards), particularly in stocks, there is no guarantee that you’ll be better off investing in any given year.

There is also an emotional dimension to this question. To some people, carrying debt feels like a huge burden, while other people aren’t fazed by owing even hundreds of thousands of dollars. If paying down your loans faster would improve your quality of life by reducing stress, it might make sense to direct more cash flow in that direction, even if it means giving up the potential to earn a better rate of return by investing. Keep in mind that, in the context of personal finance and financial planning, qualitative benefits can be just as valuable as monetary ones.

Saving and Investing

Another option is to save the money. Once you have decided to save some amount of money, you must determine what you are saving for since this will dictate whether, and how, you should invest it. We recommend thinking about your various financial goals (emergency fund, down payment for a house, saving for college, retirement, etc.) and grouping them in different buckets based on time horizon.

If the time frame for a goal is less than three years, you might want to save for it in cash rather than investing. If the time frame is longer, you can consider investing in some combination of stocks and bonds, which provides the opportunity to earn a higher rate of return than cash. The longer the time horizon, the higher the percentage you can reasonably invest in stocks. Money invested for retirement will likely have a more aggressive allocation than money invested to pay for the kids’ college.


It’s no secret that most people enjoy spending some of their cash flow, either on themselves or on others. As a busy physician, there may be purchases that could improve your quality of life, whether that means something small like a daily visit to Starbucks or something larger like a vacation getaway (if you can find the time). While it’s easy to only focus on saving and investing, don’t forget to enjoy yourself and enrich the lives of others along the way. And when thinking about how to allocate your “spending” cash flow, keep in mind that studies have shown experiences tend to produce greater satisfaction than objects. Better yet, money spent on others has been demonstrated to produce much greater happiness and fulfillment than money spent on ourselves.


When allocating limited resources across competing needs, it’s all about balance and trade-offs. You must weigh both the financial factors and the qualitative factors. While in certain situations, such as carrying credit card debt with a high-teens interest rate, the “right” use of cash flow is straightforward, in other cases it isn’t. It’s impossible to know all the financial variables, such as investment returns, in advance, and the qualitative side of the equation is different for everyone. Therefore, we find a balanced approach for allocating cash flow tends to work best for most people. While everyone would simply like to increase the size of the pitcher, by at least pouring some water into multiple cups you often feel a greater sense of accomplishment by making progress in several different areas.


About MD Wealth Management: We are an Ann Arbor financial planner that specializes in providing financial planning for physicians and retirees. We are CERTIFIED FINANCIAL PLANNER™ professionals and fiduciary financial advisors who operate on a fee-only basis, which means we do not sell financial products or collect commissions. As an Ann Arbor financial advisor, we enjoy working with clients both locally and remotely.