It is very great to have extra chunk of money in your savings account is a favourable situation. In past year we have Investor get a chance to capitalize on historically high interest rates, yet a considerable number missed the opportunity to bolster their emergency funds. While achieving a $10,000 savings milestone is commendable. It is very essential to deploy that hard-earned money effectively.
Celebrating this significant financial milestone is justified, as $10,000 can address various challenges. However, it also prompts important considerations, such as determining the optimal location for safeguarding this sum. While a savings account may seem like the default choice, it may not always be the most advantageous move. To make an informed decision regarding your money, here’s what you need to know about whether a savings account is the right fit for you. Also know about the five prudent and secure ways to allocate your funds.
KEY TAKEAWAYS
- Explore top investment avenues like elevating 401(k) contributions or initiating an IRA or 529.
- Consider using your savings for additional mortgage payments as a financially sensible move.
- Prioritize tackling high-interest debt, given that interest rates often surpass potential investment returns.
- Open a 529 account with $10,000 for the future benefit of your children or grandchildren.
- While keeping $10,000 in a savings account is acceptable, diversify into CDs or brokerage accounts for potentially higher yields.
- Evaluate various options to make informed and strategic decisions about the allocation of your $10,000 savings.
Benefits of keeping your $10,000 in a savings account
There is no issue with maintaining $10,000 in a savings account. When dealing with a reputable bank, your funds are protected by Federal Deposit Insurance Corporation (FDIC) insurance, providing coverage up to $250,000 per person per account ($500,000 for joint accounts). This ensures the safety of your money, even in the event of a bank failure, as long as you safeguard your personal and banking details.
- Interest Earning Potential:
- Savings accounts offer the benefit of earning interest over time.
- Current interest rates, influenced by economic conditions, are notably high, exceeding 4.50% in leading high-yield savings accounts.
- An initial $10,000 deposit could translate to annual earnings of $450 or more.
- Accessibility for Immediate Needs:
- Savings accounts provide easy access to funds, crucial for emergency situations or planned significant purchases.
- Opting for a savings account ensures flexibility, allowing worry-free withdrawals at any time.
- Security and Stability:
- Unlike investments prone to short-term market fluctuations, savings accounts offer a secure option for your funds.
- The stability of a savings account contrasts with the potential risks and losses associated with more volatile investment strategies.
Why you shouldn’t keep your $10,000 in a savings account ?
While current savings account interest rates are elevated, there’s no guarantee they will remain so. Moreover, even the most favorable savings accounts may not yield as much as long-term investing. Take advantage of a featured offer: save money while addressing debt with top-rated balance transfer credit cards.
- Consider Certificates of Deposit (CDs):
- CDs are a viable option if you are concerned about potential declines in savings account interest rates in 2024.
- They offer a fixed interest rate for the entire term, ranging from a few months to several years.
- Opting for a high CD rate now could result in greater interest earnings compared to a savings account over the next few years.
- Keep in mind that accessing funds in a CD before its term ends usually incurs a penalty, making it unsuitable for immediate needs or emergencies.
- Investing Your Savings:
- Caution is advised when considering investing your savings, especially for funds earmarked for short-term use due to market volatility.
- However, investing becomes an appealing choice for funds not expected to be used for several years.
- For example, the S&P 500, a widely followed market index, has demonstrated a compound average annual growth rate of 10.7% over the past 30 years.
While investing $10,000 with an annual return of around 10% over the next decade could potentially result in a sum close to $26,000, no savings account is likely to match such returns over the same period. It’s important to weigh the risks and benefits carefully when deciding between savings accounts, CDs, or investing to ensure your financial goals align with your chosen strategy.
Diversification is a key.
Each of the mentioned options comes with its own set of advantages and drawbacks. If you are not sure about committing all your resources to one avenue, think about diversifying your funds. Allocate a portion to a savings account and invest the remainder in a CD, brokerage account, or in the retirement account. This approach allows you to potentially earn higher yields while ensuring that a portion of your funds remains easily accessible. You should carefully analyze all your choices and opt for the strategy that will aligns best with your comfort level and financial goals.
Now Five Ideas to Do With $10,000, parked in your Savings account.
Push Your 401(k) Savings
Utilizing $10,000 from your savings to boost your 401(k) savings is a wise move. Especially, if your employer offers contribution too. Imagine your employer matches contributions up to 5% of your salary, but you’re currently only contributing 3%. This implies that you’re essentially leaving 2% of your monthly salary on the table. Consider ramping up your contributions to meet the company’s matching level.
- 2022 401(k) Contribution Limits:
- Standard contribution limit: $20,500
- Additional catch-up contribution for individuals aged 50 and above: $6,500
- Total contribution limit for individuals aged 50 and above: $27,000
- 2023 Projected 401(k) Contribution Limits:
- Anticipated increase in standard contribution limit to: $22,500
- Projected increase in catch-up contribution to: $7,500
- Potential total contribution for individuals aged 50 and above: $30,000
Investing in Individual Retirement Account (IRA)
When it comes to individual retirement accounts (IRAs), there are two choices—traditional and Roth, each distinguished by the tax treatment of contributions and withdrawals. With a traditional IRA, you can deduct contributions from your annual taxes, but withdrawals during retirement are taxable.
On the other hand, a Roth IRA involves contributing after-tax dollars, and the withdrawals are tax-free. It’s crucial to review the Internal Revenue Service (IRS) website for a comprehensive list of restrictions, penalties, and terms associated with each type. In 2023, the contribution limits for both traditional and Roth IRAs see an increase from 2022—$6,500 (up from $6,000 in 2022), and $7,500 ($7,000 in 2022) for those aged 50 and above.
Grow Your Nest Egg by Investing in Your Child’s Future
Consider directing your savings towards your child’s college fund, and a 529 plan is an excellent choice for this purpose. Given the continual rise in college costs, contributing to such a plan can substantially alleviate your children’s dependence on student loans. It’s important to note that while 529 contributions aren’t deductible on federal taxes, there might be eligibility for deductions on your state income tax return based on your residence.
- 529 Plan Benefits:
- Utilize funds for your child’s annual tuition, up to $10,000 each year.
- Applicable for education at public, private, or religious K-12 schools.
- Covers costs associated with a beneficiary’s apprenticeship program.
- A lifetime maximum of $10,000 can be used to pay down a qualified education loan.
- Investing in 401(k), IRA, or 529:
- Effectively participate in the stock market by investing more in your 401(k), IRA, or a 529.
- While involving more risk compared to traditional checking or savings accounts, the potential return on investment (ROI) over time is significantly higher.
- Historical data from 1928 through 2021 shows the S&P 500 with an average annual return of around 12%, outperforming most savings accounts.
Pay Your Mortgage Amount
Imagine you’re a decade into a $200,000 30-year fixed mortgage at a 6% interest rate. A modest increase of $100 in your monthly payment could result in saving nearly $19,000 over the loan’s duration, and you’ll clear your mortgage almost three years ahead of schedule. It’s worth noting that, in numerous instances, the interest rate on your mortgage exceeds that of savings accounts, especially considering that the average 30-year fixed mortgage rate was above 6% as of December 2022.
Pay your other Debt.
Utilizing a portion of your $10,000 in savings to settle high-interest credit card balances or other loans is typically a prudent initial move. This is primarily due to the substantial interest rates associated with most credit cards and consumer loans, leading to a financial loss. In essence, the potential returns from investing your $10,000 in savings into an investment or savings account would be outweighed by the interest accrued on your debt.
Allocating additional funds towards reducing high-interest debt proves to be a financially wise decision, provided your emergency fund is adequately funded.
The Bottom Line
After diligently saving $10,000, it’s now the opportune moment to make your money work in your Favor. Thoroughly investigate all associated fees and expenses linked to any investment you consider. Be cautious, as certain fees can significantly impact your investment in the long run. It’s crucial to ensure that your investment endeavours don’t inadvertently compromise the savings you’ve worked hard to accumulate.
