2020 was a year of challenges – physical, financial and otherwise. In the midst of the financial struggles early in the year, the U.S. government and Federal Reserve took extraordinary measures to help the economy get going again. These measures included the CARES Act, the Federal Reserve pushing money into the economy and purchasing bonds, and the Fed keeping rates near zero. These actions, coupled with the fear of financial uncertainty, resulted in a record year of savings for many American households. We also found ourselves spending less due to restaurant, travel and entertainment restrictions.
If you’re one of the households that has found your savings account balance creeping up, you may be wondering how to best utilize these funds. Here are some possibilities to consider:
Maintain Your Emergency Fund
Be sure to maintain an emergency fund in an easily accessible account. This could include checking and savings, money market, CDs, or high yield savings. While the interest on these accounts may be low, you don’t want to risk your emergency fund, so these less risky accounts are preferred. Typically, your recommended emergency fund is dependent on age and stage of life. If you’re currently working it may be 6-12 months of expense needs, while during retirement you may consider more in the 12-24 month range.
Earmark for Upcoming Purchases
Once your emergency fund is in an appropriate range, consider earmarking savings for upcoming larger purchases or expenses. These could include purchasing your next vehicle in cash, home improvements, or that large vacation you have coming up. By saving up the funds in anticipation, you can reduce or eliminate the amount of interest and fees associated with financing.
Increase Your Retirement Savings
Have you found additional flexibility in your monthly cash flow? Now may be a good time to increase the savings to your retirement accounts if you are not already deferring the annual maximum allowed. Be sure to utilize catch-up contributions, Health Savings Accounts, or a Roth IRA if you are eligible as well.
Start a Taxable Investment Account
A taxable investment account is an option to invest for mid to long term needs (typically 5-10 years or more) which helps to provide you with tax diversification. It’s also an option for further investment savings if you’re already maxing out your retirement plan savings.
Pay Down Principal on Debt
Paying additional principal on debt payments can be done in lump sums or in monthly amounts and could potentially cut years off your debt liabilities. Just be sure to notify the company appropriately that the excess payments should go directly to principal or you’ll miss out on the maximum benefits of paying above and beyond your monthly payment.
No matter how you choose to allocate these funds, each plan should be customized and tailored to your individual goals and needs. No planning recommendation is one-size-fits-all, so please reach out to a trusted financial professional if you’re unsure whether any of these strategies are right for you.
If you’re in need of a financial partner, or would like a second opinion on your financial plan, please contact us at 919-460-4688.
Securities offered through Raymond James Financial Services, Inc., member FINRA/SIPC. Investment advisory services offered through Raymond James Financial Services Advisors, Inc. Stonegate Financial is not a registered broker/dealer and is independent of Raymond James Financial Services. Any opinions expressed are those of Lauren Tompkins and not necessarily those of Raymond James.