Having extra savings that you don’t know what to do with is a good problem to have, especially during this time. Take a moment to be grateful. Someone on Instagram asked me this question and it’s something I’ve been thinking about myself.
The first thing to determine is what “extra” means to you
and that depends on how much cold hard cash you like to have on hand at any given time. By cash, I actually mean money in your savings or checking account that doesn’t earn much interest but is easily accessible. I consider that my emergency fund and I like to have 6-12 months worth of living expenses just sitting in my savings account hanging out.
So by my standards, anything above that would be “extra.” Some people are comfortable having 3 months of living expenses in the bank and investing the rest. It’s up to you and your risk tolerance. I wrote a whole post on why you need an emergency fund.
If you do in fact have a solid emergency fund that makes you feel warm and fuzzy inside AND you still have cash left over, then continue reading.
Reduce your tax burden
If you have extra savings, I’m guessing it’s because you made extra income last year. The downside to earning more is paying more taxes ugh. The main way to reduce your taxable income is to put money into tax advantaged accounts. 401k contributions are typically due by the end of the calendar year, but you can still contribute to IRA accounts up until April 15th (tax day). If you’re new to retirement saving, start with my Retirement Saving 101 blog post.
Open an HSA
Even better, open or contribute to an HSA account. Like IRAs, the 2020 contribution deadline also extends until April 15th of 2021. I actually just opened a second HSA account with Fidelity. HSAs are very unique in that they have a TRIPLE tax benefit:
- Contributions lower your taxable income,
- the money grows tax free,
- and you also withdraw it tax free.
401k and IRA accounts only have two out of those three benefits.
If you have a high deductible healthcare plan, then you can open an HSA. It’s very easy and took me about 5 minutes. I use Fidelity. There are a few other options – just make sure you choose one that offers index fund investing and low fees.
The contribution limit for HSAs in 2020 is $3,550 for individuals and double that for families. I recommend maxing it out if you can before putting money into any other investment accounts.
You can have multiple HSA accounts as long as you don’t go over the total contribution limit. I have two accounts – one is just a checking account that doesn’t have any investing options. I use it to pay for expenses I have now (got a cavity filled last week lol). My employer contributes to this account so it’s just free money.
I opened a second one just for long-term investing. All the money in there is in VTI (Vanguard total stock market index fund). I won’t touch it until I’m an old lady. You don’t want to be taking money out of an investment account hence the reason to have a separate one for checking.
You can really just think of it as a second retirement account because one of the biggest costs for retirees is medical care. Sorry this is not sexy advice. But when done right, investing and personal finance should be boring.
Treat yourself to something that’s been nagging at you for a long time
I have been taking barely warm (not hot) showers for the last year. I finally hired a plumber who came and replaced a part in the shower. Best $200 I’ve ever spent.
Or just keep saving
No one ever said damn I wish I didn’t have so much money. So when in doubt, there’s nothing wrong with having extra savings. And remember it’s better to grab a book and take time to make an educated decision before you jump into any investment strategy recommended by random internet people a.k.a. me.
