While the pandemic has pushed some to their financial limits, others have managed to save. Whether it was not having the expense of commuting, buying less gas, no lunches with co-workers, happy hours or weekly date night dinners at restaurants, there was an upside for some.
In fact, the U.S. personal saving rate — the percentage of people’s income remaining each month after taxes and spending — hit a record 32.2% in April, up from 12.7% in March, according to the U.S. Bureau of Economic Analysis. In a recent survey by the Pew Research Center, 19% of those polled said they’ve been saving more during the pandemic.
If you find yourself in this fortunate position and have amassed say $5,000, what’s the best use for this unexpected gift? Experts weigh in.
Start or increase emergency fund
You need a stash of at least three, and preferably six, months' money to cover expenses. "The reason for that was made very clear by the pandemic. Unfortunately when some people were faced with the loss of even a few paychecks, they went into financial distress and may have had to raise cash by selling other assets at a bad time due to the market sell-off which also occurred at that time," says Christopher Congema, an investment adviser with Landmark Wealth Management in Melville.
By not having that emergency fund, the extra loss in selling assets when they are down, paying possible taxes and penalties can often compound a problem. "If one has accumulated extra cash, it should go towards checking off the emergency fund bucket," he says.
Pay down debt
With credit card interest rates often between 15-20% or higher and savings accounts barely paying any interest, there is no reason to carry credit card balances if you have sufficient cash to pay them off or at least reduce the outstanding balance, Congema says.
Prioritize the debt with the highest interest rate first. "This will save you even more money on interest charges every month," says Joshua Zimmelman, president of Westwood Tax & Consulting in Rockville Centre.
Make an IRA contribution for 2020
The sooner one invests and allows the power of compounding to take effect, the better the potential long-term outcome. The maximum IRA contribution for 2020 is $6,000 and $7,000 if you are 50 or older.
Invest in yourself
Consider doing something to help your current situation, whether it’s enrolling in a class, hiring a business consultant, or even buying a piece of exercise equipment. "You can do something small for whatever area of your life you feel needs a little boost," Zimmelman says.
Give to charity
Once you’ve taken care of yourself, consider giving to others. "Not only will it make you feel great to help someone else, but you might even be able to claim a deduction on your tax return," Zimmelman says.
Do home repairs
There’s likely something that needs fixing that you’ve been putting off. Seize the moment. "If your home needs a repair that will end up costing you more money the longer it stays a problem, now is the time to fix it," says Jeanette Pavini, author of The Joy of Saving.
Congema advises, "Don’t try to hit a home run with the extra cash. Don’t chase the newest investment, hot stock or try to start a new business in a field that you have no experience in. When you swing for the fences, quite often you will strike out a lot more. Those are often quick ways to lose saved money without getting anything back to show for it except a painful lesson learned."
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