4 Ways to Grow Your Extra Savings
Although the Covid-19 pandemic has upended the finances of many Americans, it has given others an opportunity to bolster their emergency savings. So much so that nearly one in four Americans have saved more than 10 months of living expenses, according to a recent SoFi survey.
Another quarter of respondents say they have saved the equivalent of four to six months on living expenses so far, according to SoFi’s survey of 1,000 consumers. This is the amount experts generally recommend having on hand to avoid going into debt in case of emergencies, such as job loss, car repairs, or medical bills.
But what should you do once your emergency savings have reached a comfortable level? You can, of course, continue to add money to your savings account, but many experts say this may be short-sighted.
“The pandemic has certainly demonstrated the importance of saving for emergencies. However, having too much cash in your savings account can be harmful,” says Haley Tolitsky, certified financial planner in North Carolina. Cooke Capital.
This is because funds placed in savings earn almost no interest, so you end up losing money over time as the cost of goods increases, Tolitsky says.
To determine the best steps to take after accumulating a comfortable level of savings, CNBC Make It spoke with several financial experts. Here are four ways they recommend Americans put any extra savings to work.
If you have outstanding debt, especially high-interest credit card balances or personal loans, paying it off should be a priority, says Sarah Carlson, CFP and founder of Washington. Fulcrum Financial Group.
Many banks pay minimal interest on savings accounts, around 0.07% on averagewhile the average interest rate on a credit card is 15.91%. And if you fall behind on your card payments, you could be hit by 30% penalty APR.
“Workers need to be prepared not to get stuck in this crisis,” Carlson says. “Before they save for a new car, an iPhone, a house, they need to reduce and eliminate that credit card debt.”
Once you’ve saved up a comfortable level of emergency expenses, assess what your other financial needs and goals might be. Ask yourself if you have big purchases coming up, like saving for a down payment on a house or buying a car, says Joey Stemmlea CFP from Riverstone Wealth Advisory Group, based in Virginia.
Stemmle also recommends everyone have a “treat yourself” account that they regularly put money into so they can spend guilt-free.
“The money you spend on this account, I think of it more as a reward for doing the things you love. If you want to go get a massage, you want to have a fancy dinner, or you want to buy a new watch, you can do that. knowing that you were disciplined in putting money aside for expenses,” says Stemmle.
It may also be useful to create separate savings compartments for expenses such as future travel, entertainment and transportation costs as things begin to reopen. “You may want to set up a separate savings account to hold these funds, because remember that your emergency fund is for emergencies only,” Tolitsky says.
Check your retirement savings, including individual retirement accounts and employer-sponsored plans like a 401(k). If you don’t already contribute to a workplace pension plan, now is the time to set one up.
Be sure to contribute enough to take full advantage of any matching your employer may offer on your retirement contributions, Stemmle says. It’s basically free money that can add up in the long run.
If you don’t already have an individual retirement account, a Roth IRA can be a great way to save for retirement in addition to any employer plans you may have, Stemmle says. With a Roth IRA, you pay taxes on your money now and receive tax-free retirement income if certain conditions are met. An individual can contribute up to $6,000 to a Roth IRA account in 2021 with a catch-up contribution available for people aged 50 and over.
Setting up a Roth IRA is pretty simple — you can open an account with any reputable custodian in just minutes, Tolitsky says. She recommends setting up automatic monthly contributions and investing your funds in a low-cost index fund or ETF that covers the entire stock market.
If you already have retirement accounts, consider increasing your contribution levels or even maximizing your total savings for the year. For 401(k) plans, the contribution limit for 2021 is $19,500. People 50 and over can set aside an additional $6,500 as a catch-up contribution.
If you’ve reached your short-term savings goals and already have retirement contributions in place that you’re comfortable with (or fully maxed out), it’s worth considering a open a taxable investment account, says David Shotwell, CFP at Michigan Financial planners Shotwell, Rutter and Baer.
One of the easiest ways to start investing is to use an online investing service that will help you open an account and, depending on your risk tolerance, invest in a portfolio that typically includes funds index or low-cost ETFs, says Bryan Stiger, CFP and financial planner at Betterment. “Online services often automatically rebalance and collect tax losses for you, which is a great added benefit,” adds Stiger.
You can also do this yourself by opening a taxable investment account at a brokerage and selecting investments by hand. Carlson recommends making monthly contributions to a global value mutual fund or ETF.
“As some normality returns, people need to remember what their absolute spending limits are and have well-defined financial goals they can plan for,” Stiger says. After that, if you want to celebrate by going out for an extra dinner or two, that’s fine.