So You Saved a Little Money This Past Year. Now What?

The uneven economic recovery in the U.S. is a cruel outcome of the pandemic and systematic inequality. Millions of Americans remain unemployed, and the systems we have in place to help have failed many of them. But if you squint, there is a silver lining for some: More Americans have been able to save money and pay off debt since lockdowns across the country have meant less travel, less entertainment and less dining out.

For those lucky enough to be in such a position, possibly even for the first time, the next question is: What should I do with it, especially once life has returned to “normal”?

“Money is just like math, in that there is a good way to proceed to get the answer right in the long term with your personal finances,” said Brian Preston, certified public accountant and host of the YouTube channel and podcast “The Money Guy Show.” “This is the best time in history for a person who just has a few thousand dollars lying around.”

The big secret to being good at money is that there is only a small handful of things you really need to know.

“Learn the fundamentals,” said Tiffany Aliche, a.k.a. “The Budgetnista,” and author of “Get Good with Money.” “In a world that’s obsessed with bitcoin, shorting and trading options, the financial fundamentals are often passed over.”

She added: “The fundamentals ensure that you have a soft place to land in challenging times and a strong place to build from in abundant times.”

Here are some ideas on getting that financial education started if you were fortunate to have socked away a little extra money, roughly in the order that works for most average Americans. (Meaning: If you clicked on this article, probably you.)

Step 1

Create an emergency fund

First, fortify your finances to make sure you’re prepared for a disaster. Even before paying down high-interest credit card debt or chipping away at student loans, if you’ve been able to put away a little cash over the last year, your emergency fund should be your top priority, according to experts.

“You have to have enough to keep your financial life out of the ditch,” Mr. Preston said, recommending people have enough money squirreled away to cover a few months of living and health care expenses.

Tori Dunlap, founder of Her First $100K, a financial advice blog, agreed.

“One of the most common questions I receive: ‘Should I save first, or pay off debt first?’ If this year has taught us anything, it’s the importance of saving an emergency fund. So even if you have a good chunk of debt, prioritize saving three months of living expenses first,” Mr. Dunlap said, adding that she used a savings surplus this year to increase her emergency fund to a year’s worth of expenses.

And where should you put that money? In a high-yield savings account, like those offered by many online banks, like Ally or Marcus. (A high-yield savings account is one that offers a higher interest rate than typical banks. Here is a good place to see which banks are offering the most, though don’t expect to earn much.)

Step 2

Tackle high-interest debt

This isn’t the most glamorous path, but it is the one that will offer by far the highest returns. After padding your emergency fund to a comfortable level — around six months of expenses, give or take — consider putting any extra money you were able to save toward debt with interest of around six percent or higher, experts said.

Carrying high-interest debt makes the magic of compound interest work against you: Whereas in a savings account, the more you save the more interest you earn, with high-interest debt, the more money you owe the more interest you owe.

“You have to get very aggressive with high-interest debt, because the problem with high-interest debt is you’re turning compound interest from being a force for good and turning it against you,” Mr. Preston said. “It’s not uncommon for credit card companies to charge you 16, 17, 18 percent.”

There are a lot of strategies to paying off high-interest debt, so if that is a priority for you, read this deep dive on paying it off.

Step 3

What to do if you still have a little left

If you’re in the position to have a little cash left over at this point, a lot of options open up.

The best explanation of how to handle money I’ve ever come across is this flowchart from the Personal Finance subreddit. In clear, unambiguous terms, it shows you what you should do with your money depending on where your finances are, and how to plan for the steps to come. It generally mirrors what a good book on the subject will tell you and what most advisers would recommend.

You may also be wondering, given all the recent coverage of “meme stocks” like GameStop and AMC, if you should invest in individual stocks. Time and time again, all the data show that investing is low-cost index funds is the surest path to financial independence. It’s not the most exciting way to invest, but it is, in the long run, the most reliable. (That said, if you want to gamble a few bucks you’d be fine losing, have at it. Just never gamble more than you’re OK losing.)

For more advice on investing, check out Smarter Living’s Young Person’s Guide to Investing, and if you’re interested in hiring a professional adviser, read up here on how to find one.

If you’re in the position, also perhaps consider donating to those affected by the pandemic — here’s some advice on the best way to do it.

Step 4

Maybe just have some fun with your surplus

Erin Lowry, author of “Broke Millennial Talks Money,” said she and her husband were able to save a surplus over the last year because social events, like weddings, and a planned international trip were all canceled. They used that extra money on a major purchase: a car.

“Truly, it was an emotional decision based on the feeling of being trapped through the peak of the pandemic in New York City and that once things opened, even slightly, it didn’t feel like we had a safe way to visit loved ones,” she said. “It turned out to be a prudent decision in several ways, but it’s also a decision we knew we could reverse by selling the car.”

Mr. Preston said that if you’re able to reach the admittedly aspirational goal of saving 20 percent of your gross income for the future, “go have fun.”

“There’s a balance between being very good with your money and very miserly with your money,” he said.

Winnie Sun, managing partner of Sun Group Wealth Partners and host of “Level Up with Winnie Sun,” offered one other piece of wisdom to remember: This past year has been hard on all of us, so however you’re getting by is OK.

“The one piece of advice I’d give someone managing their personal finances in 2021 is to be kind to yourself,” Ms. Sun said. “Don’t beat yourself up if you can’t invest as much, save as much in your emergency fund or tackle those financial goals because circumstances may be beyond your control.”

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