COVID-19 shook even the most diligent penny-pinchers as jobs disappeared, budgets stretched and savings accounts went on crash diets across the country. Now that the weather appears to be breaking, many people are starting over from scratch or are back to where they were before the virus with nothing or close to it saved at all.
Either way, it’s time to apply the hard lessons learned in 2020 to saving in the post-pandemic world. GOBankingRates talked to experts and researched which pre-virus savings strategies proved worthy and which ones crumbled under the pressure of an extended crisis. Some involve strategies, others involve financial products, apps or websites. All, however, can help you build a bigger nest egg to get you through retirement — or the next disaster. Here are 10 tips for building cash reserves in the modern era.
Put Your Emergency Fund To Work For Your Nest Egg
Many experts reject the age-old wisdom about keeping X number of months worth of money in an emergency savings account. The idea is that if you invest that money instead while still keeping it liquid, you can maintain an emergency fund while also earning investment income that you can steer toward your nest egg.
“It makes no sense to have money sitting in a savings account earning .2% while paying 18% interest on credit cards,” said David Hampshere, a long-time real estate investor and founder of Painless Home Buying. “If you have the cash, make sure you put it to work and not let it remain idle. It’s great if you have the emergency funds, it helps one sleep better at night, but always make sure it’s working for you as well.”
But Never Let Your Nest Egg Become Your Emergency Fund
Other experts suggest doing the opposite — sacrificing potential investment earnings and sticking with traditional emergency savings to prevent self-inflicted wounds. By mixing your emergency savings with your investments, this theory goes, you’ll wind up pulling from your nest egg when an emergency does find its way into your life.
“Clients sometimes get frustrated when they see the market going up and are looking at that much money in cash in a savings account,” said Brendan Dooley, CFP and owner of Philadelphia-based financial planning firm Meaningful Wealth Management LLC. “But the last year turned a lot of people that had resisted emergency fund advice into believers. A lot of people learned they sleep better at night having the money in the bank, and they’re not as concerned with the opportunity cost anymore.”
Let Index Funds Do the Work For You
If you do decide to invest your savings instead of banking it, you can pick your own stocks and manage your own portfolio, pay a mutual fund manager to do it for you or buy an index fund. Door No. 3 is almost always the best option for the average investor. You can buy and sell index fund shares on the open market just like regular stocks, they’re cheap and a single share packs your portfolio with a little sliver of every stock in your fund’s index. Most importantly, study after study shows that index funds on average beat expensive actively managed mutual funds as well as the portfolios of average investors who pick their own stocks.
Build Slowly and Steadily With Dollar-Cost Averaging
The Vanguard 500 Index Fund ETF (VOO) tracks the benchmark S&P 500. If you buy a share, you automatically own a sliver of all 500 of the biggest U.S. corporations — but that share will cost you about $364. You can either save up until you can spring for a full share or you can automatically transfer your preferred amount — $5, $50, whatever — from your bank account to your brokerage account on the same day of every week or month. It’s called dollar-cost averaging, and it lets you invest consistently over time according to your own budget. Most importantly, the strategy ensures you’ll buy more stock when it’s cheap and less when it’s expensive, which is the whole point anyway.
Invest What You Can When You Can With Partial-Share Trading
Most free online brokerages — there is now no reason to pay any fees — can accommodate the kind of scheduled transfers that make dollar-cost averaging possible. Many, however, don’t allow for partial-share trading, which defeats the whole point of dollar-cost averaging in the first place. Who cares if money transfers from your bank account every month if it sits uninvested until you have enough for a full share? When you set up a brokerage account, which you have to in order to invest in the stock market, be sure to choose one like M1 Finance or Robinhood that allows partial-share investing. That’s when you can buy a fraction of a share for $5, $50 or whatever you have to spend at that time.
Consider Growing Your Nest Egg in a Roth IRA
Roth IRAs just might be the most underrated tool for growing long-term savings. It’s a retirement account, but unlike traditional IRAs and 401(k) plans, Roth IRAs are funded with after-tax money. You pay taxes now, but when you finally crack that nest egg to make a retirement omelet later on down the road, distributions are tax-free. Also unlike IRAs and 401(k) plans, which have strict and rigid rules against early withdrawals and stiff penalties for breaking them, Roth IRAs allow for early withdrawals in many cases without a penalty or loss of preferred tax status.
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Double Up With an HSA
Health savings accounts (HSAs) are one of the best options for anyone suffering from the enviable problem of having leftover money to squirrel after they’ve already maxed out their 401(k) and IRAs. HSAs let people with high-deductible insurance plans set aside money on a pretax basis to pay for qualifying health expenses. Anything you don’t spend can be carried into retirement, where it can again be distributed for qualifying health expenses tax-free. No other account lets you avoid taxes upon both contribution and withdrawal while taking out cash penalty-free along the way.
Invest In Real Estate With a Crowd
Real estate investing has built many fortunes, but doing it right takes experience, contacts, a little bit of luck and a whole lot of cash. If that doesn’t exactly describe your current situation, consider investing in real estate without actually buying land and properties. Real estate crowdsourcing sites like Funrise and Yieldstreet let you do exactly that by pooling your money with like-minded investors for sizable, predictable gains.
Try Round-Up Investing
Acorns invented the round-up investment model and it’s still the biggest name in the spare-change investing game. The format allows just about anyone to invest consistently with money that’s so inconsequential, it will hardly be missed — spare change rounded up from the dollars you spend on daily purchases. It comes with limited portfolio options and fees that aren’t part of the package with index funds, but it puts your savings plan on autopilot and takes not saving altogether off the table.
Develop Multiple Income Streams
Virtually every expert GOBankingRates interviewed agreed that COVID-19 revealed major flaws in the way Americans have always saved money and grown their nest eggs. A common theme of 2020 is that those who had money coming from more than one place generally had a much better go of things. Whether you drive an Uber, do some occasional freelance coding or sell birdhouses on Etsy, multiple income streams are the surest way to enjoy financial security in the here and now. If you can steer some or all of the gravy you earn on the side toward your nest egg, Future You will thank Present You come retirement.
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