Fiscal year 2020 for most people was a year to forget. But for others, it was a great year for them, especially financially. With all the stimulus money and with not many places to spend it, you may have some excess cash in your savings.
What might come as a surprise to some, individuals can actually have too much money in their savings account or their emergency funds. One of the most important things I continue to preach is getting the most out of the money you already have. Although money in a savings account is protected by the federal government, these accounts earn little to no interest.
According to Bankrate, the average savings account yields 0.07%. With inflation currently on the rise, you are yielding a negative real return in your savings account. Put another way, the money sitting in your savings account is losing purchasing power each day!
Most financial professionals will recommend having 3-6 months’ worth of expenses in a savings account. This can vary by your spending habits and how comfortable you are with the risk of losing income. But having a few thousand dollars in a savings account should be a solid buffer in case of an emergency.
If you are young with no family or kids than you can afford to take some risks. If you have money to speculate, look into technology, especially biotech and healthcare companies that could have massive upside. If it goes to zero, you have time on your side to make those losses back.
Here are a few tips on how to handle some excess savings:
Set up a high yielding savings account – Cash in a checking account will earn you 0% in interest. Additionally, if you have significant funds in your savings account, at least ensure it has a respectable yield. With rates still near 0%, platforms such as Marcus by GS and Ally Bank are offering 0.5%. Nothing crazy, but better than 0! Worth noting that in a rising rate environment, those yields should improve, they just may take their time adjusting them to the upside. Check out this site, which allows you to compare interest rates that are available to you: https://www.maxmyinterest.com/.
Pay Down Debt – Whenever you have extra funds available, getting rid of debt should always come to mind. When times are good, any high interest credit card balances should be addressed immediately. Why pay interest when you have the funds to pay down the balance? If you have student loans, throwing additional payments toward your outstanding balance will decrease the amount of interest you ultimately pay over the life of the loan. Debt is not necessarily a bad thing, but paying those balances in full and in a timely manner will help improve your cash flow and credit history.
Max out all retirement contributions (IRA’s, 401k’s, etc.) – When evaluating your options with extra cash, make sure you have fully funded your retirement accounts. If you are single and make less than $125,000, you can invest $6k into a Roth IRA account each year. May not seem like much, but those after-tax contributions grow completely tax free! If you have a 401k, and are under the age of 50, you can put in $19,500 per year into this retirement account. Furthermore, take full advantage of your employer matching your contributions. We don’t leave free money on the table!
Invest – Investing in the stock market incurs more risk compared to storing money into a savings account. However, the increase in risk can be offset by the increase in potential returns. Putting your money into the stock market allows you to take advantage of capital appreciation and invest in funds that pay a dividend. Even with markets at all-time highs, investing in balanced funds (comprised of both bonds and stocks) will decrease your risk but you should still yield more than a savings account.
Ally Bank provided a good visual on where your money should be to hit your savings goals:
Whatever your situation may be, make sure you are tracking your finances and putting your money into investment vehicles that work for you!
- Greg Munroe – Private Wealth Manager, Founder and CEO
Disclosure: This material is for general information only and is not intended to provide specific advice or recommendations for any individual.
All investing includes risks, including fluctuating prices and loss of principal.