Although the Covid-19 pandemic turned the finances of many Americans, it gave others the opportunity to step up emergency savings. So much so that almost every fourth American has saved over 10 months of living costs, a recent survey by SoFi showed.
Another quarter of respondents say it has the equivalent of four to six months of living costs saved so far, according to a survey by SoFi among 1,000 consumers. This is the amount that experts usually recommend on hand to avoid borrowing in emergencies, such as job loss, car repairs, or medical expenses.
But what should you do after your emergency savings reach a comfortable rate? You can, of course, continue to add money to your savings account, but many experts say it may be short-sighted.
“The pandemic has certainly shown the importance of saving in emergencies. However, it can be detrimental to keep too much cash in a savings account,” says Haley Tolitsky, a certified North Carolina financial planner. Cooke Capital.
This is because savings funds make almost no money, so you end up losing money as commodity costs rise, Tolitsky says.
CNBC Make It spoke with several financial experts to determine the best steps to take after you have amassed a comfortable level of savings. Here are four ways in which they recommend that Americans make additional savings.
If you have any outstanding debts, especially balances on high-interest credit cards or personal loans, paying them off must be a priority, says Sarah Carlson, CFP and founder from Washington Fulcrum Financial Group.
Many banks pay minimum interest on savings accounts, about 0.07% on average, while the average interest rate on a credit card 15.91%. And if you fall behind in card payments, you could be affected APR penalty of 30%.
“Workers need to be prepared not to get stuck in that grip,” Carlson says. “Before you save for a new car, iPhone, house, you have to reduce and eliminate the debt on this credit card.”
Once you save a comfortable level of emergency costs, assess what your other financial needs and goals are. Think about whether you have big purchases, like saving for bail at home or buying a car Joey Stemmle, A CFP with the Virginia-based Riverstone Wealth Advisory Group.
Stemmle also recommends that everyone have a “treat yourself” account to which they regularly invest money so they can enjoy some guilt.
“I consider the money you spend on this account more a reward for what you love. If you want to go for a massage, whether you want dinner or buy a new watch, you can do so knowing you know they were disciplined for the money,” Stemmle says.
It could also be helpful to create separate savings bins for expenses such as future travel, entertainment and business travel expenses as things start to open up. “You may want to create a separate savings account to hold these funds because keep in mind – your emergency fund is for emergencies only,” Tolitsky says.
Check your retirement savings, including individual retirement accounts and employer-sponsored plans, such as a 401 (k). If you are not already contributing to a workplace retirement plan, now is the time to establish it.
Make sure you contribute enough to take full advantage of any match your employer may offer for your retirement contributions, Stemmle says. It’s basically free money that can add up in the long run.
If you don’t have an individual retirement account set up yet, a Roth IRA can be a great way to save for retirement, in addition to any employer-based plan, Stemmle says. With the Roth IRA, you now pay taxes on your money and receive non-taxable pension income if certain requirements are met. Individual can contribute up to $ 6,000 to a Roth IRA account in 2021 with compensation for those aged 50 and over.
Setting up a Roth IRA is pretty simple – you can open an account with any reputable guardian in just a few minutes, Tolitsky says. It recommends establishing automatic monthly contributions and investing in a low-price index fund or ETF that covers the total stock market.
If you already have retirement accounts open, consider increasing your contribution levels or even maximizing your total savings for the year. For plans 401 (k), the maximum contribution limit for 2021 is $ 19,500. Those aged 50 and over can set aside an additional $ 6,500 as a reimbursement contribution.
If you’ve met your short-term savings goals and have already set retirement contributions that are comfortable for you (or have taken full advantage of them), it’s worth considering opening a taxable investment account, says David Shotwell, CFP of Michigan Financial planners Shotwell, Rutter and Baer.
One of the easiest ways to start investing is to use an online investment service to help you open an account and, based on your risk tolerance, invest in a portfolio that typically includes cheap index funds or ETFs, he says. Bryan Stiger, CFP and financial planner with Betterment. “Online services will often automatically rebalance and collect tax losses for you, which is a big added benefit,” adds Stiger.
You can do this yourself by opening a taxable account for investing in a brokerage house and manually selecting the investment. Carlson recommends making monthly contributions to a global mutual fund or ETF.
“As some normalcy returns, people need to remember what their absolute spending limits are and have well-defined financial goals that they can plan for,” Stiger says. After that, if you want to celebrate by going for an extra dinner or two, there’s no harm.