- Many Americans have record savings after a year of staying home.
- Don’t let it sit in a checking account—invest it for retirement or other long-term goals.
- If you have debts, pay them with your savings. And if your money is in good shape, take a vacation.
- Read more Personal Finance Insider stories.
One of the first changes I made at the start of the pandemic was a complete review of my personal finances. When things started to shut down and some of my work as a freelancer and entrepreneur stopped, I realized that I needed to adjust my budget quickly.
I was anxious to save money, plan ahead for possible emergency expenses (health care costs in case I got sick, or bills in case I lost my entire job), and make sure I found ways to contribute to my retirement fund.
All of these changes resulted in a tighter budget and more money in my savings account than ever before. Turns out I’m not alone.
According to the US Bureau of Economic Analysis, the personal savings rate (the amount of income people have left after paying taxes and spending money) reached an all-time high of 33% in April 2020. A year later , in May 2021, fell to 12.4%. , but it’s still high: The average personal savings rate in 2019 was 7.6%.
Since so many people keep their cash, is it smart to put it in a savings account or should we put it somewhere else?
I asked financial advisors and planners 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 move some of your savings into a Roth IRA.
Financial planner Dawn Santoriello encourages people to open a Roth IRA, if eligible, and contribute the maximum, which is $6,000 in 2021 (or $7,000 if you’re over 50).
“You will be protected from tax increases when you retire because the money will come out of this account tax-free. Now you pay taxes on the seed, but the harvest is tax-free,” says Santoriello. “This will have a huge positive impact on the amount of money you’ll be able to spend in retirement. With traditional IRAs, you don’t pay taxes on the seed, you pay taxes on the harvest.”
2. Pay 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 toward debt might be a better idea than sitting in a bank account.
“Cash in the bank probably isn’t paying much more than 0.01% into your checking account right now, but you may be paying a lot more than that in interest on various loans,” says Hult. “Start by paying off the debt with the highest interest rate. Credit cards are notorious for charging high interest rates, so start there.”
3. Invest wisely
The pandemic has also caused an increase in people investing. A Charles Schwab survey showed that 15% of current retail investors started investing in 2020.
Financial advisor Grant Cooper recommends investing in a diversified portfolio.
“In investing, they say there’s no free lunch. If you want to get a higher return on your cash, you’re going to have to invest, which comes with risk,” says Cooper. “A diversified portfolio using low-cost index funds has become the method of choice among many novice investors.”
If you won’t need your savings for the next five years, investing it could be a smart way to build long-term wealth.
4. Add to that emergency fund
Although many people were able to save substantial sums in 2020, many others suffered financially and had to use (or drain) their emergency funds. Either way, financial planner Sarah Jane Paulson recommends making sure her emergency fund is fully funded.
“One-third of Americans still couldn’t cover an unexpected $400 expense, according to the
Paulson says. “That tells me there are a lot of households that don’t have a full emergency fund, which is three to six months of full expenses. Emergency funds must sit in cash. You have to be ready to go when life throws you a curveball. The best thing a person can do with that cash 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 money there before you invest.
5. Go on vacation
You might not expect a financial planner to tell you to spend your cash on a vacation, but that’s exactly what Joe Cope recommends.
“It may be strange to hear that from a financial advisor, but our clients’ mental health and well-being are just as important to their financial health. If you’ve established an emergency fund, paid off consumer debt, and are off to a good start in retirement have fun and celebrate getting through your most challenging year ever,” says Cope.