Despite the economic calamity of the past year, a recent study says just over half the country has managed to squirrel away some cash since the first lockdown.
That’s encouraging news — however, almost 80% of savers are planning to keep their money liquid by leaving it in their checking or savings account, the Franklin Templeton-Gallup Economics of Recovery Study reveals.
While it’s always a smart idea to maintain a healthy emergency fund — experts suggest keeping enough cash on hand for three to six months worth of expenses — dumping all of your savings into a bank account is rarely the best move in the long run.
It’s tempting to play it as safe as possible right now, but your future needs will still be there once the pandemic is over. Here are some things to consider before you bury your savings in the bank.
Interest rates for traditional bank accounts stink
The biggest problem with leaving your savings in a checking or traditional savings account is that your money won’t have a chance to grow.
Traditional accounts pay practically nothing in interest; as of January 2021, the average interest rate for a checking account is 0.04%. Any meager earnings you see will be obliterated by inflation.
However, it’s not hard to find high-yield savings accounts that offer 10 times more interest — and provide the same ease of access you would have with a traditional account.
And if you’re willing to give up some liquidity on a portion of your savings, even for a few months, you may be able to earn even more interest with a certificate of deposit (CD).
CDs offer higher interest rates than most other savings options but lock your money away for a predetermined period. If you run into some unexpected trouble, you can pull out your cash early; however, you’ll have to pay a penalty that could wipe out a big chunk of your earnings.
Investing a chunk of your savings can pay off
If you haven’t tried your hand at investing yet, the idea of getting started during the pandemic is probably pretty daunting. That said, one of the keys to successful investing is starting as soon as possible. Releasing your grip on just a little cash now can boost your long-term savings by a lot.
These days investing doesn’t require you to find a broker and drop big bucks upfront. In fact, certain investing apps let you start investing in big-name stocks like Tesla and Apple for as little as a dollar.
Instead of buying a full share for hundreds or sometimes thousands, you can buy fractions of a share for however much you’re willing to spend. All the same principles apply: When the stock does well, you’re poised to make a profit.
If the idea of trading stocks on your own stresses you out, try using an automated investing service — some even let you invest your spare change.
Robo-advisors handle all the tough decisions for you, like what to buy and when to sell.
Just choose the risk level that you’re most comfortable with, and sophisticated software will do the rest. Any time the market changes, your robo-advisor will adjust your portfolio accordingly to minimize your losses and maximize your returns.
Padding your retirement fund will make life easier
The pandemic has forced millions of Americans to resort to risky financial moves in order to get by. That includes tapping into their retirement accounts.
Nearly 60% of Americans have plundered or borrowed money from a 401(k) or an IRA during the past year, according to a recent survey released by Kiplinger and Personal Capital.
On the other hand, if your emergency fund is in good shape and you’ve managed to save a surplus in lockdown, putting extra money into your retirement accounts will ensure you’re on track for the future.
If you’re not sure how much you can safely add right now, it’s wise to sit down with an expert like a certified financial planner (CFP).
A CFP will build you a personalized plan based on your income, job stability and long-term goals. You’ll get valuable insight on how to make the most of your retirement accounts without sacrificing too much of your liquidity.
Some banks offer free financial planning services to their clients, but you should consider looking into an unbiased, independent option. You can connect with an online CFP for a lower rate than you’d pay with an in-person adviser.