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Saving is always a god thing, but savings accounts aren’t always what you need. We’re covering where you can stash your cash that can do more for you than your traditional savings account.
So you’ve Saved, Now What?
Saving six to twelve months of your expenses is an essential financial strategy that can provide a safety net for whatever life can have in store. This type of emergency fund can help keep. You covered if you lose your job, have a medical emergency or other unexpected financial hardship.
Having a significant amount of savings set aside can also help reduce stress and provide peace of mind knowing that you have financial resources to fall back on in case of an emergency. This can also help prevent accumulating debt from using credit cards or loans to pay for unexpected expenses. Establishing a solid savings is an important step to create a strong foundation for your financial future and provide a cushion for unexpected financial events.
But once you’ve saved what you need, what’s next?
Why Think Beyond your Traditional Savings?
Traditional savings accounts aren’t fit for every situation. There are some key disadvantages to keeping too much dough in a regular savings account.
One of the main disadvantages of keeping too much money in a traditional savings account is that it may not keep pace with inflation. Inflation refers to the rate at which the cost of goods and services increases over time, and if your savings are not earning a return that is higher than the rate of inflation, the purchasing power of your money will decrease. This means that over time, the same amount of money will be worth less and will not be able to buy as much as it could before.
Another disadvantage of keeping too much money in a traditional savings account is that the interest rate paid by many savings accounts is relatively low. Even high-yield savings account may only offer slightly higher interest rate, but it still may not be enough to grow your money significantly.
The low interest rate of savings accounts can be a missed opportunity for higher returns elsewhere. Diversifying your investment portfolio can be crucial for long-term growth and having too much money locked in low-yield savings account can limit your potential in the long run.
Retirement Accounts
401(k)
If your employer offers a 401(k), then you need to be taking full advantage of it. Having automated retirement savings is a life saver, especially if you are prone to unnecessarily transferring funds from your savings. Keeping funds in your 401(k) plan makes your funds less readily accessible, putting extra barriers between you and any savings sabotage.
Using an employer's 401(k) plan can also be a smart way to take advantage of the tax benefits of a retirement account, as contributions to a 401(k) are made pre-tax, which can lower your taxable income, and the account's balance grow tax deferred. If you're eligible and your employer offers a 401(k) plan, it can be a smart move to participate.
Roth IRA
A Roth IRA is an individual retirement account that allows individuals to save for retirement on a post-tax basis. This means that contributions to a Roth IRA are made with money that has already been taxed, and the money in the account can grow tax-free. When money is withdrawn from the account during retirement, it will also be tax-free, as long as certain conditions are met.
One of the main advantages of a Roth IRA is that it provides tax-free income during retirement. Since contributions are made on a post-tax basis, withdrawals during retirement are not subject to income tax. This can be especially beneficial for individuals who expect to be in a higher tax bracket during retirement. Additionally, Roth IRA contributions can be withdrawn penalty-free if they are needed to be used as emergency fund, or to pay for certain expenses like buying your first home, education and some medical expenses.
Another advantage of a Roth IRA is that it has no age restrictions for contributions, unlike a traditional IRA, which will require you to stop contributing once you reach age of 70.5. Additionally, Roth IRA does not require you to take required minimum distribution during your lifetime, which can make it a more attractive option for individuals who want to leave their savings to their beneficiaries.
Additionally, contributions to a Roth IRA are subject to income limits and may not be available to those with high income, but with a little strategy, it can be possible to work around these limits and benefit from the savings vehicle.
Investment Accounts
If you want to level up your finances, you’re going to want to start investing. It can seem intimidating, but investing is essential if you want to meaningfully grow your wealth in the background of your life.
In Conclusion
Your savings are essential, but once you’ve contributed enough to your savings account it might be a good idea to spread your financial wings and let your money grow elsewhere.
Here are a few things to remember about developing your savings.
- Save six to twelve months of expenses to be prepared for emergencies
- Utilize a retirement account, whether that be a 401(k) or Roth IRA
- Start investing early