Top 5 Ways to Use Your Cash
So you’ve saved up or are looking to save up your cash — congrats! Now, what are you going to do with it?
More importantly, why save in the first place?
In The Power of Habit, Charles Duhigg explains that successful habit formation hinges upon creating new behavioral loops and reinforcing them with rewards. Underlying motivations can help considerably — enter goal setting. Achieving your goals impacts your ability to form new habits and supports your motivations, creating a positive feedback loop. Brains produce higher dopamine levels when we accomplish our short-term goals, which consistently reinforces new behavior patterns, including a savings mindset.
Personal finance behaviors such as planning and saving evoke feelings of sacrifice and seem daunting at the onset. How can we get past these feelings? Play into the feedback loop! Start small and shoot for a string of wins. Ample research illustrates that scoring a set of wins (i.e., short-term goals) builds motivation and desire to learn new habits. Rewards are nice too. When you reach your monthly savings goal, buy yourself a nice dinner. Plan a nice getaway after meeting your yearly savings goal. As long as the reward does not set you back on your journey, have at it.
Let’s dive into what you can do with your cash.
1. Put it in a high-yield savings account
As of this article’s writing, the yield on a 10-year Treasury bond is at a record low 0.6% APY due to the Fed’s coronavirus stimulus efforts. In effect, this event has pulled down the interest rate on savings vehicles, though some offer a higher rate, such as a high-yield savings account (HYS). A HYS account is a savings vehicle that provides a relatively higher rate on your money than you would find at a traditional bank (think Chase or Citi).
Online banks offer HYS accounts that are FDIC-backed and have no account balance minimums. Leading banks in this space such as Ally, Marcus by Goldman Sachs, and Synchrony Online currently offer rates of 1.05% on their HYS accounts. For comparison, Citi offers 0.04% (on accounts with less than $10,000), and Chase offers 0.01%, and both come with account balance minimums.
This means using any of the online accounts results in a 26x or 105x difference, respectively, on what you make for your money compared to a regular bank!
These accounts are excellent for saving up cash for a near-term need (i.e., emergency fund) or keeping your funds liquid. With this type of account, you shouldn’t expect to earn a real return on your money as it’s intended to preserve the value of your cash. This type of account acts as a partial buffer against inflation which at 2–3% a year can eat away at the value of your money over time.
2. Invest in the Markets
Putting a substantial portion of your savings into the market will create actual returns, grow your wealth, and prepare you for retirement. Owning stocks, mutual funds, index funds, bonds, or a combination thereof consistently is the key to success. For perspective, if a person invested $10,000 in an S&P 500 index fund (basket of stocks of top 500 publicly traded US firms) in 2000 and held for 20 years, that $10,000 would become $31,200 due to a 5.9% average annualized rate of return. The most popular investment vehicles are listed below:
401k — a tax-advantaged retirement account where you can contribute up to $19,500 in pretax contributions per year. Contributing today decreases your taxable income, but your withdrawals will be taxed in the future. An employer usually offers this account with a matching option if you contribute a certain amount. The standard advice is to contribute enough to maximize the employer match. You can begin taking withdrawals at 59 ½.
Roth IRA — a tax-advantaged retirement account where an individual can contribute up to $6,000 / year on a post-tax basis. Contributions do not affect your taxable income, and your withdrawals are tax-free starting at 59 ½ — who doesn’t like free money? A Roth IRA can be set up individually and is a great vehicle to invest through for people who expect to need more money in retirement and currently make less than $139,000.
Traditional brokerage — a brokerage account where you can invest at any time and pay taxes upon selling your investments. Buying and selling investments often can rack up your tax bill at your highest marginal rate, while losing up to $3000/year in the markets reduces your taxable income. Holding an asset for longer than 1 year and then selling triggers a separate taxation scale for long-term investing gains. You can set up a brokerage account on various online platforms, including Robinhood, TD Ameritrade, and Charles Schwab.
3. Start up a Side Hustle
Starting a side hustle is a great way to build your skills and make a few bucks. It’s easier than ever to find or create a side job in the gig economy — apps like Fiverr or TaskRabbit have hundreds of jobs that people post, from resume editing to furniture repair. See this article from The Entrepreneur on 50 different side hustle ideas to gain inspiration. A side gig allows you to diversify your income sources and earn extra cash for a big buy, build savings, or reduce debt, among other things. Great side hustles are flexible, pay well, and most importantly are scalable — they can grow into something more significant if you want. Remember, online businesses are easier to scale than others.
4. Save up & Spend on a Hobby
Travel, flying, scuba diving, etc. A list of unique experiences can go on and on. It seems the best ones are also the most expensive. One can make their hobbies a reality through consistent saving. Opening up a dedicated account, naming it, and automating your savings will motivate you and set you up for success. Life is too short to save for buying a house and putting off your dreams until retirement. There’s a lot to see and do in this world in the meantime.
5. Invest in yourself
There can be no better use for your money than to invest it in yourself — welcoming new experiences into your life and broadening your horizons. Put your money towards where you want to grow. Buy that online class for the thing you’ve always wanted to learn, purchase that ticket to your dream vacation spot, or get that great book you’ve always wanted. I enjoy photography and bought Phil Ebiner’s course on the topic during a Udemy fire sale.
It’s all up to you, remember — the greatest return you can produce is through investing in yourself.
** Up your personal finance game with me at www.financefuturists.com **
