5 smart ways to use your savings, according to financial professionals
- Many Americans are sitting on record savings after a year of staying at home.
- Don’t leave it in a checking account, invest it for retirement or other long-term goals.
- If you have debts, pay them off with your savings. And if your money is in good shape, take a vacation.
- Read more stories from Personal Finance Insider.
One of the first changes I made at the start of the pandemic was a complete overhaul of my personal finances. When things started to stop and part of my job as a freelance writer and entrepreneur was put on hold, I realized I had to adjust my budget quickly.
I was eager to save money, plan ahead for any emergency expenses (health costs in the event of illness or bills in the event of loss of all my work) and make sure that I always found ways to contribute to my pension fund.
All of these changes resulted in a tighter budget and more money in my savings account than ever before. It turns out that I am not alone.
According to the United States Bureau of Economic Analysis, the personal savings rate (the amount of income people have after paying taxes and spending money) hit an all-time high of 33% in April 2020. One year ago later, in May 2021, it fell to 12.4%. , but it’s still high – the average personal savings rate in 2019 was 7.6%.
Given that so many people keep their cash, is it smart to keep it in a savings account or should we put it somewhere else?
I asked financial planners and advisers what Americans should do with their savings – this is what they told me.
1. Iincrease Roth IRA retirement contributions
One idea is to take a look at your retirement fund and see if it makes sense to transfer some of your savings to a Roth IRA.
Financial planner Dawn Santoriello encourages people to open a Roth IRA, if they’re eligible, and contribute up to the maximum, which is $ 6,000 in 2021 (or $ 7,000 if you’re over 50).
“You will be protected from rising taxes when you retire because the money will flow out of that account tax-free. You now pay taxes on the seeds, but the harvest is tax-free, ”explains Santoriello. “This will have a huge positive impact on the amount of money you can spend in retirement. With traditional IRAs, you don’t pay tax on seeds; you pay taxes on the crop. “
2. Pay off the debt
If you’re in debt and haven’t started thinking about paying it off, Cécile Hult, a financial planner, says putting your savings on your debt might be a better idea than leaving it in a bank account.
“Probably the cash in the bank isn’t earning much more than 0.01% on your checking account right now, but you might be paying a lot more than that in interest on various loans,” Hult explains. “Pay off the debt with the highest interest rate first. Credit cards are notorious for charging high interest rates, so start there.”
3. Invest wisely
The pandemic has also triggered an increase in the number of people investing. A survey by Charles Schwab showed that 15% of current retail investors started investing in 2020.
Financial advisor Grant Cooper recommends investing in a diversified portfolio.
“By investing, they say there is no free lunch. If you want to get a better return on your money, you have to invest, which comes with risk,” says Cooper. “A diversified portfolio using low-cost index funds has become the preferred method of many first-time investors. “
If you won’t need your savings for the next five years or so, investing them could be a smart way to build long-term wealth.
4. Add to this emergency fund
While many people were able to save substantial sums in 2020, many more suffered financially and had to draw (or drain) their emergency funds. Either way, financial planner Sarah Jane Paulson recommends making sure your emergency fund is fully funded.
“A third of Americans still wouldn’t be able to cover an unexpected $ 400 expense, according to the
Paulson says. “This tells me that there are a lot of households that don’t have a full emergency fund, which is three to six months of full spending. Emergency funds must remain in cash. He must be ready to go when life turns a curve. The best a person can do with that money is put it in a high yield savings account. “
If you don’t have three to six months of savings in a high yield savings account, direct your extra cash there before you invest.
5. Go on vacation
You might not expect a financial planner to tell you to spend your money on vacation, but that’s exactly what Joe Cope recommends.
“It might be strange to hear this from a financial advisor, but the mental health and well-being of our clients is just as important to their financial health. If you’ve established an emergency fund, paid off consumer debt and got off to a good retirement, have fun and celebrate having had a tough year, ”Cope said.