It’s time to reconsider your savings plan in light of the rising inflation and interest rate increases by the Fed.
Inflation isn’t just making everything you buy more expensive. It’s also taking a huge bite out of your savings.
Although the cost of living is increasing at an 8 percent annual rate, Most savings rates are still far below 1 percent, even with the largest monthly increase in nearly 40 years, at 5 percent. That means your cash is rapidly losing value. Thus, it’s time to devise a fresh plan for storing your funds.
In an effort to curb inflation, the Federal Reserve is raising interest rates more quickly; most recently, with a 0 75 percentage point increase. Although banks have begun to raise their own deposit rates, these increases are typically gradual and small. The savings account rate recently has averaged about 0. 13 percent.
This does not imply that you should withdraw funds from savings accounts. Whatever the rate, it’s critical to keep cash on hand in case something unforeseen occurs.
“Your savings accounts should be used to cover emergency expenses and help you weather stock market downturns without panicking, not to maximize returns,” advises Manisha Thakor, a certified financial planner and financial educator at MoneyZen in Portland, Oregon.
Nevertheless, if rates rise even further in the upcoming months as many forecasters predict, it makes sense to shop around for the best deal.
Currently, big national online banks that offer interest rates of two percent are Ally and Synchrony. 00 percent or more on brand-new online savings accounts, with offers from other banks like American Express National Bank for two Deposit Accounts, a website that tracks depository banking products, reports that one-year certificates of deposit have interest rates of at least fifty percent.
Some smaller players are competitive as well. The online branch of Texas Capital Bank, Bask Bank, is providing a savings account with a 2 20 percent annual percentage yield (compound interest plus the rate), no monthly service charge, and no minimum balance requirements (The account may be closed if the initial deposits are not made within 60 days; there is a $35 fee for outgoing wire transfers.) ).
Regarding CDs, Rising Bank, the Missouri-based Midwest BankCentre’s online branch, is offering a 3 A 12-month CD yielding ten percent annually with a $1,000 minimum deposit (There are penalties for early withdrawal. ).
Here are four tactics to think about if you’re planning your savings more long-term. Remember that nothing prevents you from utilizing more than one of them, contingent upon your objectives.
Congratulations! You’ve come into some extra cash, and now you’re wondering what the best way to use it is. Should you treat yourself to something special, pay off debt or invest for the future? The answer depends on your individual circumstances and financial goals. But don’t worry, we’re here to help you navigate your options and make smart decisions with your newfound funds.
Prioritize Paying Off High-Interest Debt
While it may not be the most exciting option paying off high-interest debt is often the most financially savvy move you can make with extra cash. This is especially true in today’s environment of rising interest rates. Your credit card debt personal loans, or student loans could become even more expensive if their interest rates are variable. By eliminating high-interest debt, you’ll save money on interest payments and free up more cash flow for other important financial goals.
Build a Robust Emergency Fund
An emergency fund is a crucial safety net for anyone who wants financial stability. Unexpected expenses, such as medical bills or car repairs, can arise at any time. Having an emergency fund ensures you have readily available cash to cover these expenses without resorting to high-interest debt or dipping into your retirement savings. Aim to accumulate three to six months’ worth of living expenses in a high-yield savings account or money market account, which typically offer better interest rates than traditional savings accounts.
Invest for Your Future
Once you’ve tackled high-interest debt and built a solid emergency fund, consider using your extra cash to invest for your future. This could involve increasing your contributions to your employer-sponsored retirement plan, such as a 401(k) or 403(b), or contributing to an Individual Retirement Account (IRA). Aim to contribute at least 10-15% of your pre-tax income to your retirement accounts each year. If you’ve already maxed out your contributions, consider opening or adding funds to other investment accounts, such as a health savings account (HSA), brokerage account, or automated investing account.
Invest in Yourself
One of the best investments you can make is in yourself. Consider using your extra cash to further your education or pursue entrepreneurial dreams. For education, a 529 plan offers tax-advantaged investment growth and tax-free withdrawals for qualified educational expenses. If you have entrepreneurial aspirations, use your extra cash to jumpstart your business, reducing reliance on loans and setting yourself up for success.
Consider the Timing and Context
The timing and context of receiving extra cash can influence your decision-making. For instance, inheriting money after a loved one’s passing is likely an emotionally charged experience. In such cases, take your time and consider putting the money aside until you feel ready to make informed decisions. Short-term savings options like interest-bearing accounts can be suitable for this purpose. Additionally, assess your budget for upcoming expenses. Could you use the extra cash to prepay your car insurance or other recurring bills?
Treat Yourself (Moderately)
While prioritizing financial responsibility is crucial, there’s nothing wrong with using some of your extra cash to treat yourself. However, be mindful and ensure your purchase aligns with your overall financial goals. Consider putting the money into a savings account for a while and reflecting on how you want to spend it. You might choose to indulge in a small treat while using the rest for debt repayment, investments, or further savings.
Whether it’s a tax refund, a bonus, or an unexpected inheritance, extra cash presents an opportunity to improve your financial well-being By prioritizing debt repayment, building an emergency fund, investing for the future, and making smart spending decisions, you can leverage your windfall to achieve your financial goals and secure a brighter future. Remember, being thoughtful with your money, regardless of its source, is the key to unlocking financial success.
Frequently Asked Questions:
1. How much should I save for emergencies?
Aim to accumulate three to six months’ worth of living expenses in your emergency fund. This will provide a financial cushion to cover unexpected expenses without jeopardizing your other financial goals.
2. How much should I contribute to retirement accounts?
Strive to contribute at least 10-15% of your pre-tax income to your retirement accounts each year. This will help you accumulate a sizable nest egg for your future.
3. What are some good investment options for extra cash?
Consider investing in a diversified portfolio of stocks, bonds, and other assets. You can also explore options like index funds, mutual funds, or exchange-traded funds (ETFs) for a more hands-off approach.
4. How can I invest in myself?
Investing in yourself can take many forms. Consider pursuing further education, starting a business, or developing new skills that can enhance your earning potential.
5. Is it okay to treat myself with extra cash?
Yes, it’s perfectly acceptable to treat yourself with a portion of your extra cash. However, ensure your spending aligns with your overall financial goals and doesn’t jeopardize your long-term financial well-being.
You Want High Returns and Convenience in Exchange for Some Risk
Money market funds are an excellent choice for holding some of your emergency funds or as a backup savings account. They’re offered by mutual funds and investment companies.
The funds invest in debt, including short-term corporate and municipal debt (also referred to as “commercial paper”) and extremely safe short-term Treasury bills. Although they are easier to use if you also have a brokerage account, they are not insured, in contrast to savings and money market accounts.
However, there is a possible advantage: savings accounts and money market funds both react swiftly to fluctuations in interest rates.
The trade-off is that, despite the relative safety of these funds, you’re increasing your risk by overinvesting in high-yield savings accounts, according to Eric Bronnenkant, head of tax at Betterment, a New York City-based online investment firm.
You might think about investing in a fund that focuses on U S. Rather than investing in corporate debt, Allan Roth, the CEO of Wealth Logic, a financial planning firm located in Colorado Springs, Colorado, prefers government-backed securities.
For example, the Vanguard Treasury Money Market fund, recently yielding 2.13 percent, mainly holds Treasury bills. That rate is likely to increase, Roth says. As a bonus, income from Treasury securities is exempt from state and local income tax.
Although some money market funds have no minimum investment requirement, most have one that is $500 or higher. (Most Vanguard funds have a $3,000 minimum. After the initial deposit, there’s usually no cap on the amount deposited or withdrawn, or on the number of transactions you can make. You have access to write checks, set up direct deposit, and, in certain situations, use ATMs.
Check the net expense ratio, which should be well below 0.25 percent. (Many funds temporarily waived expenses [PDF] during the pandemic, but fees have edged back up.)
Fidelity Money Market, for instance, charges 0.18 percent, or $1.80 per $1,000 invested. Compare expenses among money funds using the free Fund Analyzer sponsored by FINRA, the self-governing body of the investment industry.
You Want Safety and Maximum Interest on Funds You Access Regularly
Online savings accounts are among the safest savings vehicles, with federal insurance covering up to $250,000 in deposits per holder, whether through a bank or a credit union. (A joint account with two holders is insured for up to $500,000.)
You can find the rates offered for these high-paying accounts on websites such as Deposit Accounts and Bankrate. (For both websites, scroll below the top listings, which are paid placements.) Check the minimum deposit, fees, and features, such as ATM access and check writing. And note the limitations, such as the number of free monthly withdrawals.
Additionally, you can check the rate history of the account on Deposit Accounts by clicking on the details box. According to Deposit Accounts founder and editor Ken Tumin, if the account has been open for a number of years, there’s less chance that the current APY is a teaser rate that will drop later.
Savings accounts and money market accounts both provide yields, but money market accounts have a few extra advantages and limitations. Similar to savings accounts, these are provided by banks and credit unions and are insured up to $250,000 per individual holder. Because they are investing your money in safe, short-term Treasury debt, institutions are able to offer higher rates on these accounts.
According to Tumin, you might get better rate stability in a money market account if you can deposit a sizeable sum there as opposed to an online savings account. This is due to the fact that certain money market accounts have higher rate tiers for balances over a predetermined threshold, like $25,000, and are less likely to subsequently adjust rates at those higher tiers.
Make sure the money market account has the features you need. As with online savings accounts, some banks may limit withdrawals or check writing. For example, Vio Bank Cornerstone Money Market Savings Account doesn’t offer check writing or an ATM/debit card.
Look through customer reviews at Deposit Accounts to learn about people’s experiences opening, keeping, and closing accounts. Take note of the bank’s financial standing as well, which Deposit Accounts evaluates using a range of recognized financial benchmarks. Even though the percentage of banks with poor ratings is very small and your savings are insured, staying away from D- or F-rated institutions could spare you headaches should you need to access your money in the event of a default.