When it comes to managing your finances, one of the key steps towards financial health is budgeting wisely and spending less than you make. This practice allows you to have extra money to save every month, which can help secure your financial future and provide peace of mind in case of unexpected expenses.
However, once you have extra cash saved up, the question arises – where should you put it? There are several options to consider, and the best choice depends on your current financial situation, goals, and other factors. Generally, there are six main options for allocating your extra cash, and here is how they are typically ranked in order of priority:
1. Emergency savings
2. Retirement fund
3. College savings
4. Checking account
5. Standard brokerage account
6. Rainy-day savings
Of course, this ranking may vary depending on your individual circumstances. For example, if you already have a robust emergency fund but are behind on retirement savings, you may want to prioritize retirement over emergency savings. Similarly, if you don’t have children, college savings may not be a factor for you.
Emergency savings are crucial for financial stability. Most financial planners recommend having at least a six-month emergency fund to cover unexpected expenses. If you don’t have $1,000 set aside for emergencies, that should be your first priority. Once you reach that threshold, you can focus on other savings goals while continuing to contribute to your emergency fund.
Retirement savings should be a top priority after establishing an emergency fund. Financial experts suggest saving around 10% of your income for retirement, not including any employer matching contributions. It’s essential to ensure your own financial security in retirement to avoid becoming a burden on your children later in life.
College savings, if applicable, should come after retirement savings on the priority list. While it’s natural to want to help your children with their education, it’s essential to prioritize your own financial well-being first. A 529 savings plan can be a valuable tool for saving for college expenses.
In addition to emergency, retirement, and college savings, you may also consider keeping some extra cash in a checking account for day-to-day expenses. A standard brokerage account can be a good option for long-term savings if you are already on track with retirement savings. High-yield savings accounts are ideal for shorter-term goals, as they offer a higher interest rate than traditional savings accounts.
In conclusion, there is no one-size-fits-all answer to where you should put your extra cash. It’s essential to assess your financial situation, goals, and priorities to determine the best allocation for your savings. By making smart choices and prioritizing your financial health, you can set yourself up for long-term success and security.
