Congratulations! Over the last few months and years, you’ve worked hard to build up your savings! Now that you have this considerable amount of money put aside, you might be wondering what to do with the money you've saved. Well, in this article we’ll discuss some options about what to do with savings to give you some ideas for your next steps. Let's get into it!
1. Ensure you have rainy-day savings in place
Having rainy day savings aka emergency savings is an essential and foundational part of a financial plan. This means you'll have money to navigate unplanned life circumstances or emergencies. And so you definitely want to ensure that a portion of the money you have saved can adequately cover a potential rainy day.
Keep in mind that your emergency fund should be big enough to cover emergencies like:
- A car repair
- Several months of unemployment due to loss of a job or an illness
- Urgent home repair
- Any other unexpected life expenses
2. Define the costs around your financial goals
Once you have an emergency fund it’s time to get clear about what your short-term and long-term goals are. Short-term goals can consist of home renovations that you’ve been delaying, planning a much-needed vacation, or giving to the people or causes you care about. You’ve worked hard to ensure that all of the essentials were taken care of that now it’s time to fund some of your lifestyle goals.
Whatever your goals consist of, be intentional about the money you begin to spend. Create a list of must-haves and wants and prioritize. Creating a spending plan or priority list will help you get clear about where to put your money. If you’ve been saving for your goals and are now wondering what to do with the money in savings a priority list can help you get clear on what you value most.
Don’t forget about those long-term goals though. You have time on your side. Begin to use the money you have saved for future goals like having a financially healthy and secure retirement. Get familiar with using a compound interest calculator to understand the power of saving and investing money over time.
3. Pay down debt
If you have any lingering debt, especially high-interest debt, it's a good idea to leverage some of your savings to pay it off. Debt can be really expensive and will only continue to go as a result of compounding interest.
Putting a lump sum towards your savings can help you get ahead of those interest payments and can save you a ton of money in the long run. Once the debt is gone, you can repurpose the money that was focused on debt payments towards saving and investing even more!
4. Review your retirement account options
Retirement may be decades away for you, but using retirement accounts to invest can help you grow your money. It’s essential to confirm that any contributions you are making to your retirement accounts are actually being invested.
Did you know you can contribute up to $20,500 a year to an employer-sponsored retirement account? The IRS allows most people to reduce their taxable income by using tax-deferred accounts like a 401k, 403b, or Thrift Savings Plan (TSP). If you aren't contributing the maximum consider increasing your contributions.
Review what investment funds are available to you in your retirement plan options. Look up information about the funds including the sectors or industries they follow, expense ratios, and whether they are focused on US or Global markets.
Most companies will send quarterly statements. Take a look at the rate of return or performance of the investment both for the most recent months as well as the history of the fund. What type of mutual funds is your retirement account invested in? Do the investment options align with your long-term goals and values?
Review other tax-advantaged accounts
IRAs are a great way to invest for retirement and build a nest egg regardless if you are also participating in an employer-sponsored account. Roth IRAs may not be tax-deferred but any investment growth can be withdrawn tax-free at retirement age!
If you are self-employed
Don’t worry if you are self-employed and don’t have access to the traditional 401k plan. Here is a list of retirement accounts designed specifically for self-employed individuals that might be available to you:
5. Be strategic about taxes
Are you a HENRY? It’s an acronym for a high earner not rich yet. Although having a tax strategy can benefit everyone, it’s particularly important for high-income earners who can easily see their incomes reduced by 30% or more.
Tax planning is very important because your tax obligation can end up eating into a large chunk of your investment gains (aka capital gains). This, in turn, can impact the overall financial plans you may have made around your money. Be sure to understand what your capital gains tax rate is. You may be enjoying your life after money, but you’re still responsible for paying taxes.
The IRS tax rules incentivize saving and investing for retirement. As a high-income earner consider using retirement accounts to build wealth and reduce your tax bill.
6. Create a plan for those who depend on you
If you are fully using retirement accounts and still wondering what to do with left-over cash, here are a few things to consider.
Family/friend fund for giving
If you are the person that others depend on when an emergency strikes, it might be worth setting money aside for your loved ones. It’s important to set boundaries when it comes to family and money. But if you know you could get a call about a blown-out tire in the middle of the night, it might be worth having a fund for family emergencies or gifts that you can draw from to give when needed.
Retirement assistance for the older parents
In many communities, particularly communities of color, many of us are first-generation college-educated and might be earning more than our parents ever have. It’s crucial to have conversations with our parents about their plans are for retirement.
Social security payments can be as low as a few hundred dollars a month. How will your loved ones pay for food, housing, and medications? If you are in a position to financially prepare to support your parents, creating a savings plan for their needs can ease the burden on you in the future.
Legacy fund for the next generation
Whether you have kids or are proud to be that fun and adventurous auntie, you might consider what financial legacy or generational wealth you’d like to create and leave behind for future generations.
Still have money to spare?
Have a fully-funded emergency account? Contributing the max to an employer-sponsored retirement account or funding an IRA? Have savings accounts for both your wants or needs? Then it's time to think of other ways to build and grow wealth.
Additional places where you can put your money
Explore other areas of investment including taxable brokerage accounts, real estate, and/or investing in a small business either as an owner or as an investor. Each of these has its own risks and advantages. If you are comfortable and are willing to spend some time doing some research, you might want to consider investing some of your money in other avenues.
Understanding whether you prefer a passive or an active investing approach. Investing in the stock market is the most common way people invest; however if you already have the bulk of your money in the stock market, why not consider something else?
You have done an amazing job building up your savings and now you can accelerate your wealth-building journey. As you continue to save, it's ok to loosen the purse strings a bit and focus on what matters most to you. I encourage you to spend on the things that bring you joy as long as it’s aligned with what you value most.
Take those trips you've always wanted to. It’s finally time to start checking off your travel bucket list! Enjoy the life that you've been working so hard to create—you deserve it!