My beat tends to be the stock market, and for good reason. Over time, the market has been the single-best place to put your savings, offering returns that have left every other standard asset class in the dust.
And more fundamentally, how much should you be saving every year?
If we’re doing a good financial spring cleaning, then we need to discuss basic savings priorities. Let’s jump into some of the savings questions I come across most often, starting with the most basic:
How much cash should I keep in my savings account?
This question is really going to depend on your stage of life, your marital status and your ability to take risk.
If you are young, have no spouse or children to support and can potentially run back to Mom and Dad if things were to take a bad turn for you, I’d say that you’re fine keeping just a month or two of basic living expenses in the bank. The rest of your savings can be diverted to something riskier, like a stock market investment or a small-business idea.
Similarly, if you are married and your spouse works, you have a safety net of sorts. If you can pay your basic living expenses on just the salary of one of the spouses, then you can keep very little in the savings account, perhaps as little as a couple months. The rest can be invested more aggressively or spent enjoying your lives.
But if your spouse stays at home with the kids and you are the only source of income for the family, you might want to keep as much as six to 12 months of basic expenses in a savings account.
In short, if you have no safety net to fall back on, you need to be a lot more conservative.
With interest rates still barely above zero, does it make sense to keep money in a savings account at all?
It certainly does, and here is why.
If you keep your excess cash in your primary checking account, you’re a lot more likely to spend it. But keeping the cash in a separate savings account (or even a separate checking account you don’t look at regularly) keeps it out of sight and out of mind. That’s important, because making the money too easy to access can turn a valuable safety net into a debilitating crutch.
Again, don’t expect to get much in the way of return in a savings account. That’s not what we’re trying to accomplish here. These days, the only real purpose of a savings account is get the money away from your grubby little spendthrift hands.
So, let’s say you’ve been a diligent little saver and you have more than enough in your savings account to tide you over in the event of an emergency …
What can you do with your surplus savings?
Well to start, make sure you are maxing out your 401k plan at work. In 2016, you can contribute a full $18,000, not including your employer’s matching funds. Let’s say you can’t reasonably save that amount on your current salary. No problem. You can dip into your savings account to cover your living expenses, making up the difference.
A 401k plan comes with fantastic tax breaks and very strong lawsuit protection. It makes sense to funnel every last cent you can from a taxable account with no protection to a tax-deferred account with rock-solid protection.
If you’ve maxed out your 401k plan, you should see if you qualify for an IRA or a Roth IRA.
If you have a high-deductible health insurance plan, you may also be able to stash a little cash in an HSA investment account. In 2016, you can put $3,350 into a plan as an individual and $6,750 as a family. And you can even drop in an extra $1,000 if you 55 or older.
While having “too much” in a savings account is a high-quality problem, it’s still a problem in a world of high taxes and low yields. Making moves like these provide a viable, tax-efficient solution.
Check out our full checklist if you haven’t already, or tab back over to the checklist to see other ways you can clean up your portfolio.
Charles Sizemore is the principal of Sizemore Capital, a wealth management firm in Dallas, Texas.