Got $5,000 Saved? Here Are 6 Things You Should Not Do With That Money
Saving $5,000 is a challenging feat for many Americans. Across the country, many people struggle to save, and while the data differs on average savings balances, a recent GOBankingRates survey found that nearly one-third of Americans have $100 or less in their savings accounts.
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But just because you’ve saved $5,000 doesn’t mean you should stop paying attention to your savings or make ill-advised money moves. Consider the following six suggestions for what you should not do once you have $5,000 saved.
1. Don’t Stop Saving
Even if you’re ahead of many others regarding how much savings you have, that doesn’t mean you should necessarily stop saving once you hit $5,000. As many financial experts recommend, you might want a larger emergency fund to cover three to six months’ living expenses.
You also will likely need to save and invest substantially more to afford retirement, so try not to get complacent once you reach $5,000. According to a Northwestern Mutual survey, the average American in their 60s has $112,500 in retirement savings, while the average American thinks they’ll need nearly $1.3 million to retire. So, $5,000 is a good start, but you should generally be saving and investing money month after month, year after year, to reach these levels.
That doesn’t mean you can never spend money, but the point is that you should gain clarity on your savings goals and work toward reaching them. Odds are, you could benefit from more than $5,000 in savings. In addition to areas like retirement savings, consider setting savings goals for future purchases, like buying a car. Having savings to draw from can potentially cost you less than taking out a loan for new purchases.
2. Don’t Make Overly Risky Bets
While you might think that $5,000 is your ticket to reaching larger goals like having a fully funded emergency fund, getting there typically takes patience and sound, long-term money management practices. What you probably don’t want to do is start taking big, unnecessarily risky bets with that $5,000.
“Sure, it’s tempting to turn that $5,000 into $50,000 overnight. You’ll find all sorts of tempting offers, but high-risk investments are like a rollercoaster you can’t get off. Stick to safer options,” said Luis Andino, founder and CEO of debt management app Ditch.
The exact moves to make can depend on your situation, but as one example, if you were to invest that $5,000, you might do so in a diversified index fund rather than buy stock in a single, high-risk company.
3. Don’t Overspend on Luxuries
Saving money might make you feel like you can let loose and reward yourself, but that can be a slippery slope. While you might decide to treat yourself to something small when reaching savings goals, like enjoying a nice meal, you want to make sure you can still afford that and not let small rewards spiral toward overspending.
“Don’t splurge on unnecessary luxuries,” said Andino. “It can be tempting to feel like this new safety net awards you the right to indulge in things traditionally out of budget. But remember that lasting wealth is built by living below your means.”
4. Don’t Ignore High-Interest Debt
Some people choose to build up their savings while still having debt. While this might work in select cases, such as if you want to have money for emergency expenses to avoid having to take on even more debt, you still should review your debt situation and see if it makes sense to put more money toward paying that off.
In particular, high-interest debt could cost you more money than you realize.
“Something we see frequently at Ditch is people that have the means to pay off high-interest debt but delay doing so. This hesitation can be costly. High-interest debt, like credit card balances, can snowball due to compound interest, leading to thousands lost in interest payments over time. If you have the funds, prioritize clearing these debts,” said Andino.
“It’s not just about reducing what you owe; it’s about stopping the bleed of your hard-earned money into endless interest payments,” he added.
5. Don’t Forget About What You Want
Sometimes, savings goals can be arbitrary, and you might get too caught up in saving specific numbers, like going from $5,000 to $10,000 to $50,000, without thinking about why you’re saving. If you’re only focused on saving money, you need to review how those savings can improve your life to handle yourself. Try to balance enjoying your money now and protecting it for the future.
“Don’t forget about yourself,” said Andino. “Yes, being responsible is great, but totally neglecting your own needs can lead to burnout. Set a little aside for yourself; it’s okay to enjoy your hard-earned money, within reason.”
6. Don’t Ignore Interest Rates
If you have $5,000 in savings, you might decide to keep all that money in a savings account. However, you could miss out on earning more money if you park those funds without considering how much interest you’re earning.
For example, if your savings account pays 0.01%, as some banks do, you’d only earn $0.50 in annual interest. But if you put that money into a high-yield savings account that pays 5% annual interest, you’d earn $250 per year off that $5,000 (before factoring in taxes and compound interest). So, choosing where to keep your savings can make a big difference in interest income.
Overall, saving $5,000 is an accomplishment, but you must be mindful about what you do next. You likely need to balance several factors. On one hand, your savings journey probably isn’t over. But you don’t want to have such a single-tracked mind that you totally ignore your wishes for using your money. Nor do you want to make mistakes like taking on unnecessarily big risks or ignoring high-interest debt.
So, consider reviewing your full financial situation after reaching this milestone, recalibrate your goals if necessary, and be conscious about what will bring you closer to those goals rather than taking a step in the wrong direction.
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This article originally appeared on GOBankingRates.com: Got $5,000 Saved? Here Are 6 Things You Should Not Do With That Money
