You’re sitting on a massive cash pile of savings, and you’re really not too sure what to do about it. What do you do? You log on to the internet, you go to Reddit and you ask the personal finance gurus there what to do with your savings. A few hours go by and you get hundreds of responses, and there’s a problem, they all have different answers. I mean one person wants you to buy a taco stand, and the next person wants you to yellow it all into AMC and weed stocks, he’s clearly a wall street bets guy. And then there’s some wise guy telling you to invest it all in the rare fish market.
Whether you got a thousand dollars, five thousand dollars, twenty-five thousand dollars, or even fifty thousand dollars in savings, this is going to be the definitive article on some of the best things you can do with your savings. Even in the crazy environment that we’re in with high-interest rates, inflation, supply chain problems, and the threat of a recession. If your money is just straight up sitting in cash, it’s really not doing that much for you but losing purchasing power since inflation is around 8% right now.
We always want to make sure we’re having our cash work for us, or at least to have a plan for our cash. If we are sitting on a large cash pile, that could be potentially fine so long as we had a plan for it like maybe we’re saving to buy a house, saving for a wedding, or college expenses, that’s fine if you expect that you’re going to need it soon. Now if you have no plan and you’re just kind of stockpiling cash for no reason other than it looks good in your bank account, then I’m just not the biggest fan of that. So let’s get into the first one which is to,
1. Pay Off Any High-Interest Rate Debt
Paying off high-interest rate debt with excess savings. If you still have a debt of anything over 10% of an interest rate and you’re sitting on cash, you should be using a portion of those savings to start paying that off. This is because a 10% interest rate is known as a high-interest rate, at least to me. And a lot of consumer debt like credit cards are going to be around that 15% to 20% interest rate range.
When it comes to paying off debt, there are two famous methods that I like to default to. One is called the debt snowball method, and the other is the debt avalanche method.
For a lot of people that struggle with the motivation of paying off debt, you’ll probably want to opt for the debt snowball method. That’s where if you have multiple lines of debt, let’s say you owe money on a personal loan, a medical bill, a student loan, and then perhaps you have two different credit cards, you have five different lines of credit that you owe money on.
|Credit card 1||$800||25%|
|Credit Card 2||$1,200||25%|
In the snowball method, you’re tackling the debt with the lowest balance first regardless of the interest rate. So let’s say your medical bill is $500, you’ll pay that one off first, then after you pay that off you’d go on to the next bill that you owe basically the second lowest amount on and pay that off, and so on and so forth. And that way it’s kind of like a snowball because once you get rid of that debt source you’re starting to build some momentum, and it’s a little bit like less on your mind.
If you have an overwhelming number of bills every single month like if you had five or six bills that you had to pay, it’s a little bit too much for your mind to handle because you’re always thinking about “oh man, what’s the next payment I gotta make?” And that’s really really tough financially and mentally. Now, there is a method called the debt avalanche method and that’s where it can save you the most amount of money, but it takes the most amount of discipline.
This is where you’re going to pay off your debt according to how large the interest rate is regardless of the balance size in that case. You would pay off the debt with the highest interest rate then you would slowly move down the list. Now, this is a little bit scary because let’s say your biggest balance was $10,000, it might seem like you’re making these payments on this big balance but you’re never really getting anywhere. That’s the only downside of the debt avalanche method. However, you are maximizing your return on your dollar for paying off debt.
In the table above, the two credit cards probably have the highest interest rate so we’d want to pay those off first and make minimum payments on the rest of our debt lines. Once that’s done we can continue down the list.
Basically paying off debt is essential to getting a solid financial foundation, and if you have some extra savings you should be using some of it to pay off any debt that you have.
2. Contribute to Retirement Account
The next thing that you can do is to take some of your savings and contribute it to a retirement account. If you’re noticing that some of your savings are going up at a fast rate and if you aren’t saving for retirement already, here are going to be some of your options;
I. ROTH IRA
First, you can start off with a Roth IRA, that’s where you can contribute up to $6,000, it’s an individual retirement account, and basically, the best part of the Roth IRA is that all your earnings and profits are tax-free. Now, I said you can contribute $6,000 a year, if you are over the age of 50 you can contribute $7,000 a year.
But for the most part, you’re limited to your contributions because of basically how good the account is. When you retire, you won’t pay any taxes on any of the earnings in the account. The only other downside of the Roth IRA is that you need to wait until the age of money or else you’re gonna take a 10% penalty on those gains. So that’s the first part you can contribute some of your savings into a Roth IRA.
Another option is to ask your employer to see if you can start contributing more to your 401k. The maximum you can contribute to your 401k is $20,500 per year, and you can start by telling your employer that you’d like to contribute a larger percentage of your paycheck to this account. By contributing to a 401k you also get a tax reduction in the year that you contribute to it.
Again with the 401k, since it is a retirement account you will need to wait until the age of 59 and a half to withdraw from it without penalty. But these accounts are great because they basically force you to save for later which many Americans just are not doing these days.
According to research by the federal reserve, they found that the median retirement account balance in the united states, looking at those who do have retirement accounts was only $65,000 in 2019. That’s pretty low and if you read my articles on retirement on this blog, or how much you need to be invested to live off of your investments, you’ll know that you need way more than $65,000 to live off your investments.
So number two is increasing your contribution to retirement accounts or even starting a retirement account. But if you already have your debt paid off and a retirement account already fully funded, another thing you can do with your savings is to
3. Buy Series I Savings Bonds
You can buy these bonds from the united states government or you can find the equivalent for your nation. The interest rate for Series I savings bonds right now is 9.62% and it’s virtually risk-free because it’s backed by the US treasury. You can go to treasurydirect.gov and the rate is good through October 2022 and even beyond because the new rates are set depending on inflation metrics.
If you happen to be reading this post from say September 2023 or early 2024 please comment below with what the current rate is, but basically it’s an adjustable rate depending on inflation.
There is a limit of $10,000 per calendar year on this savings bond but the cool thing is that you can even buy it for others as a gift like your children. So let’s assume you buy the savings bond, there are going to be two key dates that you need to keep track of and that’s going to be year one and year five.
After year one, that’s when you can cash out the bond for the interest but you will pay a three-month interest penalty. After year five that penalty goes away because you’re holding it for a longer period of time. Basically, the government is trying to incentivize you to save through the savings bond and fight against inflation.
It provides a pretty decent return in the medium term and I think it’s a good option for many people out there that have some excess savings sitting around in their bank accounts.
4. Invest Your Money
The fourth thing that you can do with your savings if you can afford it is to invest your money. If you’ve never invested before, using a small percentage of your savings to get into the habit can be a good idea for the long term. If you’re already invested in assets, you can use some of your savings to make your portfolio more complete and diversified.
Diversification is a core component of good investing because let’s say you invested your entire investment balance in Crock stock, for example, you’re really risking the biscuit on a pair of shoes with holes as a design feature. It would have worked out really well during the pandemic, but recently you would have gotten a rude awakening with the stock price. A well-diversified portfolio means that you’re investing in all types of asset classes, and within your stock portfolio hopefully across different sectors as well.
The idea of diversification is that if one sector of your portfolio just tanks completely, at least you have four or five others to kind of bolster or buoy it up. Let’s say you had five different asset classes in your portfolio and one of them was the worst-performing one, hopefully, you still had four or five other asset classes to keep your portfolio afloat.
In terms of asset classes, there’s real estate, you can invest in stocks, bonds, cryptocurrency, precious metals or commodities, and alternative assets like art, and certificates of deposits can also be good as well,
In terms of allocation, investing always comes down to what your goals are. For some of you that are risk-averse, that might be a portfolio with 50 bonds, and CDs, and the rest would be in precious metals. For a riskier type of investor with a longer-term time horizon, they might have an allocation like 40% stocks, 40% crypto, and 20% alternative assets for example. For 95% of people, investing in index funds or ETFs is a great way to diversify in the stock market without doing much work.
An index fund is a type of pooled investment that you can buy in your retirement accounts or your brokerage account. The fund itself will invest in different sectors or indexes, and by buying into that one fund you own a small percentage of everything that it owns. So a real-world example is if you were to buy the S&P 500 index fund, by buying that one fund you would own a small percentage of every stock in the S&P 500 thus tracking the entire index.
That automatically provides diversification because your investment is now spread across 500 different companies. And buying an index fund is actually just way cheaper than individually buying each of those 500 companies on their own.
So those are some options for investing that you can do with your savings.
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5. Fortify Your Emergency Fund
The fifth one on our list is actually to fortify our emergency fund. An emergency fund is ideally an account that you do not touch unless for what the name implies emergencies. Most people suggest three months of living expenses set aside for an emergency fund. So let’s say your total living expenses for every single month were $3,000, that would be $3,000 X 3 months or $9,000.
If you have excess savings what you can do is you can increase your emergency fund to six months or even 12 months of living expenses to be on the safer side. Doing so will give you much more peace of mind even in a volatile market environment. And even if something catastrophic were to happen to us or a loved one knocked on your door, we can handle the financial burden that might bring.
I don’t know about you but I operate the best when I don’t feel too pressured, so having a big emergency fund is a big priority for me especially now that I’m in my 20s. I think for me it just really gave me the proper mindset to go out there and continue just to focus on making more income and grind.
6. Contribute to a High Yield Savings Account
All right, the sixth one is to put some of our savings in a high-yield savings account. Since the federal reserve is starting to increase interest rates, what you’re going to start noticing is that the banks that offer high-yield savings accounts, they’re going to start following in step with the federal reserve and start to offer you higher and higher percentage yields on their savings rates.
Ally bank is an online bank that usually has good high-interest yields for savings accounts, and they’re always being updated depending on what the interest rate is set by the fed.
The idea here is that if you’re holding some cash, at least you’re getting some return on your money even though we won’t be outpacing inflation which is coming in really hot. Other great banks with high-yield interest-bearing accounts are Marcus by Goldman Sachs, and I even saw some new apps like SoFi offering a decent yield these days as well.
At least with a high-yield savings account, if you do plan on keeping that cash liquid at least you’re going to get a little bit of return, and as long as you have a plan for your savings that’s all that really matters. Peach and Happy Hustling!!