Because I haven’t been eating out at restaurants as much as I used to, I have extra money left over at the end of every month that I don’t know what to do with. I realize this is a great problem to have, but I could use some help determining my next move. I know there are a few places I can put that money (savings account, high-yield savings account, money market account, CD, traditional IRA, Roth IRA). What should I be considering when figuring out the option that’s best for me? — So Many Ways to Save
Dear Ways to Save,
Kudos to you for not already finding a way to disappear those extra dollars! Having some money left over at the end of the month that you’re able to add to your savings plan is a great feeling. Whenever I talk to customers about savings (of any kind) I start with two questions: What are you saving for? When is that goal going to happen? This kind of specificity around what and when is necessary to guide the conversation. Since I can’t get that kind of information from you as I write, I’ll plug in a couple of sample scenarios.
I start with two questions: What are you saving for? When is that goal going to happen?
Next Summer Vacation
Let’s pretend for a moment that we’re living in a post-coronavirus world where carefree summer vacations are on the table. And in order to live your best life oceanside next summer, you’re going to need some savings. So, when you notice some extra cash in your checking account each month, you wonder: Could that money be working harder for me in another kind of account?
Let’s cover the basics real quick before we get ahead of ourselves. Let’s assume you’re already on top of your budget, spending 50% of your typical income on your required expenses, 30% on discretionary items and of the 20% you use for paying down debt and saving, you’ve already got a good cushion going to take care of unexpected expenses like new tires or an A/C tuneup on your house, etc.
OK, now that that’s settled, let’s hone in on that vacation fund. It sounds like the money you’ve got to put toward this new account is recurring, meaning you’ve got some every month, and you expect to keep having about the same amount to deposit for a while to come. In this case, you could hang on to that extra money until you’ve got about $1,000 or more and consider a shorter-term Certificate of Deposit account (or CD). At Frost, we offer a few CD options that will not only give you a higher rate of return than your typical savings account, but will also reach maturity by the time you’ve found the perfect beach house to rent. However, with a CD, you won’t be able to add to it monthly, so it might be interesting to pair that term account with a savings account that has the best rates you can find. This way you’ve got a lump sum working harder for you with the CD rates of return, but you’ve also got a safe place to stash the extra money you continue to accumulate.*
On the other hand, let’s say you’ve already got a healthy vacation fund (waiting for travel to be safe and fun again), but you’d like to squirrel away this extra money for a longer-term goal. Maybe you’ve got a big anniversary coming up in about 10 years and you’d like to do something really special for the occasion. When you have more time on your side, you open up the possibility of investment accounts. An adviser can talk you through the details of what they’d recommend based on the amount you have to start, your risk tolerance and your financial goals.
I hope these sample scenarios were helpful. Certainly having some extra money to save is a great problem to have, and because you’re getting smart on savings options, you’ll make progress toward your goals in no time.†
* Deposit products offered through Frost Bank, Member FDIC.
† Investment and insurance products are not FDIC insured, are not bank guaranteed, and may lose value. Brokerage services offered through Frost Brokerage Services, Inc., Member FINRA/SIPC, and investment advisory services offered through Frost Investment Services, LLC, a registered investment adviser. Both companies are subsidiaries of Frost Bank.
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