You’ve now managed to save a good bit of money. Now it’s time to learn how to start making your savings work for you.
By Jenny Hoff, Photo by Mathieu Stern
You’ve finally done it. You followed the age-old advice to spend less and save more. Now you’ve got a chunk of change sitting in the bank, ready to invest and you don’t know where to start. First off, congratulations! Getting out of debt and saving money is one of the most powerful feelings, especially when it’s a first-time experience. If you’ve saved up some money (let’s use $10,000 as an example) you have a few choices.
Tuck it away somewhere safe for a rainy day.
This is probably the least exciting of your choices. But financial experts agree you should have at least three to six months of living expenses in a savings account just in case. (2020 proved “just in case” can happen very quickly and unexpectedly.) If this is your only savings and you don’t have any other money to tap into in an emergency, it’s smart to put the $10k in a separate savings account so you won’t use it and it can accrue a bit of interest.
Unfortunately for savers, interest rates are currently very low. But there are a few online banks offering 2% or more, which is better than most banks offering almost nothing. Banks are often also offering promotions to open a new account, asking you to deposit a certain amount of money and keep it there for at least six months to earn the bonus. These bonuses can be $250 or $500 depending on the promotion. It’s not going to make you rich. But at least it’s a chance to earn more than average for your savings without risk.
If you already have a rainy-day fund or you’ve saved up more than you need for six months of living expenses, consider investing your money into a vehicle that will allow you to grow more money. Compound interest is the most powerful financial concept. If every child were taught it in school, we wouldn’t have the debt problems we have today. Invest $10,000 into a low-cost index fund (like the S&P 500 through Vanguard) and you could earn an average of 10% return per year. To put it another way, invest $10,000 now and don’t touch it for 30 years; you’ll have somewhere in the ballpark of $175,000. Even better, invest the $10,000 and add $100 to your investment monthly; in 30 years you’ll have about $424,000. That’s the power of compounding.
Save up for a first-time home.
Although $10,000 won’t be enough for a down payment for most homes in Austin, it’s a good place to start. If you’re a first-time homebuyer, you can qualify for programs that will allow for a lower down payment and potentially some assistance. Depending on your income and type of job, you could also qualify for assistance from organizations like Texas State Affordable Housing Corporation (TSAHC).
The most important thing you can do with your newfound savings is to keep it intact or, hopefully, make it grow. Money is easy to spend, hard to save. Through a little research and some smart steps, you can start making your money perform a valuable function. Produce more money to secure your financial future.