There are hundreds of good reasons to save your money. But if you’re not stashing it in the right place, then chances are your money isn’t going to be put to work and grow as efficiently as it could.
In this post, we’ll go over seven of the best places to save your money for optimal returns.
1. High-Yield Savings Account
Savings accounts, whether they’re online or a traditional brick-and-mortar branch, unfortunately just don’t pay as good of interest rates as they used to. These days, it’s almost impossible to find one that pays above 1 percent. However, there’s still an excellent reason why you should consider them: Your emergency fund.
Your emergency fund should be a cash reserve of 3 to 6 months’ worth of living expenses that you can dip into any time you need. This is so that you don’t have to rely on a credit card or personal loan to cover the cost of the emergency and get yourself into debt unnecessarily. Check out a regularly updated list like this one here to find the latest offerings.
2. Your 401k Plan
When it comes to saving for the future, your workplace 401k retirement plan is generally one of the first tools you’ll want to consider.
Your contributions will be invested in funds that have the potential to compound and multiply several times over. For instance, saving just $500 per month into your 401k over the next 30 years and investing in a simple stock market index fund earning 10 percent per year would have the potential to grow your nest egg to $1,130,244. (You can try this for yourself using this calculator here.)
On top of this, 401k plans have a lot of other unique benefits:
- Your contributions are tax-deductible which means whatever you save will lower your taxable income for that year.
- All of your earnings will grow tax-deferred until you withdraw once you’ve retired.
- Employers will often match the contributions (up to some pre-defined limit).
- You can borrow up to $50,000 (as long as your plan administrator allows it).
To use a 401k, you have to work for an employer that offers one. Savers are allowed to contribute up to $19,500 per year into their 401k plan ($26,000 if you’re age 50 or older).
3. Traditional IRA
Your 401k isn’t the only place to get awesome tax-deferred benefits. Outside of your employer, you can also save your money into an IRA (individual retirement account).
IRAs basically work the same way as 401k plans when it comes to tax-saving benefits. However, the major difference is that you can set up your IRA with any financial institution you’d like and pick your own investments. Contributions are limited to $6,000 per year (or $7,000 if you’re 50 and older).
4. Roth-Style Accounts
If you’d like to save your money into a retirement account where the tax savings are on the back-end of your working years instead of the front-end, then what you need is a Roth-style account.
Roth IRAs and 401ks are essentially the opposite of traditional style accounts. You’ll pay taxes on your contributions in the year that you make them. But then when you retire someday, all the withdrawals will be tax-free.
For many people, the prospect of having a source of tax-free income is exciting. This can be especially beneficial if you’re building a sizable nest egg and expect to be in a higher tax bracket once you’ve retired.
Another useful feature of Roth IRAs is that you can withdraw your contributions any time you want since you’ve already paid taxes on them. You’re just not allowed to withdraw the “earnings” portion until age 59-1/2 unless you want to pay taxes and penalties.
The same is true of Roth 401k plans. However, because your employer administers this plan, you’d have to get their permission first.
5. Stocks and ETFs
Outside of your retirement plans, there are a few other places where you can save your money for potential long-term growth. One of those is in a simple taxable brokerage account using stocks and ETFs (exchange-traded funds).
Whereas a stock is a share of ownership in a company, an ETF is more like a basket of securities (containing various stocks, bonds, etc.). Both types of investments can grow in value, but they can also fluctuate or even lose money depending on how the market is behaving.
ETFs are usually less risky than individual stocks because you’ll diversify across hundreds of companies at one time. However, individual stocks have a greater potential for higher gains. A good stock portfolio will strike a balance between risk and reward that will allow you comfortably sleep at night.
From a tax perspective, the capital gains and dividends you earn from both stocks and ETFs are taxed according to a lower marginal tax bracket system than what you pay on your earned income. For instance, while you might be paying a 22 to 24 percent tax rate on your paycheck, your capital gains and dividends will be taxed at 0 to 15 percent.
6. Mutual Funds
Investing in mutual funds is another great place for your savings. Mutual funds are similar to ETFs in that they contain hundreds of various stocks, bonds, etc. Just like stocks and ETFs, they carry the risk to lose value. But by design, the diversification of their contents should minimize that risk and produce more stable returns.
Compared to stocks and ETFs, you will have to pay taxes each year on any mutual funds purchased through a taxable brokerage account. This is because capital gains and dividends are incurred throughout the year as the fund manager changes the composition of the fund. By contrast, you’ll only pay taxes on the capital gains of stocks and ETFs when you sell them.
7. Health Savings Account
If your insurance premiums are fairly high, then your employer might offer you what’s called an HSA or health savings account. This is a special tax-advantaged account where you can save money that you will later use to reimburse yourself for medical-related expenses. However, similar to an IRA, your contributions will be invested and grow into the future.
From a tax perspective, an HSA offers you the best tax advantages:
- Tax-deductible contributions
- Tax-free growth
- Tax-free distributions (as long as it’s for qualified medical expenses).
After age 65, any unused savings in your HSA will be turned into an IRA. Therefore, whether you’re saving for medical expenses or not, it pays to max out this account as much as possible.
If you need help finding more money to save, then let a budgeting app like Buxfer help show you where to look. When you use Buxfer to track and organize your financial transactions, you’ll get a comprehensive report of how your budget is performing and which categories you might be exceeding.
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