We’re all supposed to have money set aside for a rainy day, and ideally, your emergency fund should contain enough cash to cover three to six months’ worth of essential living expenses. That way, if you lose your job or get hit with an unplanned bill, like a sudden home or car repair, you’ll have funds to tap and won’t get stuck racking up costly debt to cover that expense.
But what happens if your emergency fund is complete and you have extra money to save? To be clear, this is a very good problem to have. Here are some options you can look at if you’re set on emergency savings but want to keep socking away cash.
1. Open a certificate of deposit (CD)
Today’s CD rates aren’t much to write home about. But when interest rates are higher, CDs can be quite lucrative given their risk-free nature. With a CD, the money you put into the bank is FDIC-insured (up to $250,000 per depositor), so you won’t have to worry about losing principal. And in exchange for locking your money away for the duration of your CD, you’ll enjoy a higher interest rate than what a savings account will pay.
Of course, there is the risk that you’ll be penalized if you close out your CD before its term is up — to the tune of several months’ interest. But if you already have a fully-loaded emergency fund, that’s less likely to happen since you can tap your emergency fund before having to cash out your CD.
2. Fund an IRA or 401(k)
Saving for near-term emergencies should take priority over funding a retirement plan. But once you’re all set with the former, it pays to focus on the latter. You’ll need savings of your own to cover your living expenses in retirement — don’t be fooled into thinking Social Security will be enough. The sooner you start setting money aside for your senior years, the more opportunity your money will have to grow.
You have several options when it comes to saving for retirement. You can sign up for your employer’s 401(k) plan if it offers one, or you can open an IRA on your own. With an IRA, you generally get more options for investing your money than with a 401(k), and some IRAs offer an automatic transfer feature so you can put a portion of each paycheck into your account before you get a chance to spend it.
3. Open a brokerage account
With an IRA or 401(k), you can invest for the future and enjoy tax benefits in the process. But for both of these account types, you can’t access your money until age 59½ without facing costly penalties. While it’s important to sock away funds for retirement, you may also want to look at opening a brokerage account and investing some of your money there.
With a traditional brokerage account, there’s no tax benefit at hand, and there’s no protection of principal like you’ll get with a CD. But, you’ll have an opportunity to grow your money and you’ll have the option to access it any time without penalty.
What’s the right home for your extra cash?
Having a solid emergency fund is a great thing. But once you’re comfortable with the amount of money you have set aside for unplanned expenses or an extended period of unemployment, it pays to find a good home for the rest of your money.
Sure, you could keep stashing it in a regular savings account. But if you do, you’ll limit your money’s ability to grow, since savings accounts, even in the best of times, aren’t known to pay much in interest. Rather than limit yourself, look into a CD, retirement plan, or brokerage account for your extra cash. Or, divvy up your money among all three options. Doing so could help you meet different goals at varying stages of life.