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Building an emergency savings fund is an important financial milestone. But where should your money go once your emergency savings account is fully funded? Should you start investing? Save for other expenses? Take a vacation?\u00a0<\/p>\n
As a financial educator and a former NFCC-certified credit counselor, I've helped thousands of people answer this question. In most cases, the answer is similar. There's a specific progression of financial moves that nearly anyone can make to increase their financial stability.\u00a0<\/p>\n
If you've fully funded your emergency savings, here's where I recommend putting your money next.<\/p>\n
How do you know if you have enough money saved for emergencies? Although there's no set amount that works for everyone, most experts agree that you should aim for at least three to six months' worth of your living expenses (not income).\u00a0<\/p>\n
That said, this amount won't be adequate for everyone. You should aim to save more than six months' worth of living expenses if you fit into any of the following categories:<\/p>\n
It's difficult to find work in your field<\/p>\n
If your emergency savings is fully funded, congratulations! As for your next steps, there's a progression of financial milestones you'll want to focus on accomplishing. Here's the best order to follow.<\/p>\n
High-interest debt can be a major threat to your financial stability. Even if you invest in the stock market, you won't earn high enough returns to offset the interest charges. That's especially true if you have credit cards, which average 21% APR.<\/p>\n
As counterintuitive as it may seem, I recommend prioritizing high-interest debt \u2014 generally debt with an APR of 8% or higher \u2014 before putting extra money toward savings beyond a basic emergency cushion. Paying off an 8% debt effectively gives you a guaranteed 8% return by eliminating future interest charges.<\/p>\n
By comparison, even competitive high-yield savings accounts (HYSAs) and certificates of deposit (CDs) top out at about 4% APY. So, you're actually losing money if you put extra funds into a savings account instead of using the money to pay off high-interest debt.<\/p>\n
Do you have a high-deductible health plan (HDHP), such as a Bronze or Catastrophic plan?\u00a0<\/p>\n
If you do, I would highly encourage you to open a health savings account (HSA) right away. These accounts can be used to pay for qualified medical expenses, including prescriptions, dental services, and lab fees. Plus, they have an incredible combination of benefits that you don't get from any other type of financial account, including:<\/p>\n
Contributions are tax-deductible, meaning they reduce your tax bill.<\/p>\n
Withdrawals for qualified medical expenses are not taxed.<\/p>\n