I don't know about you, but that money in my savings account feels pretty precious. Especially if you've ever worried about being able to pay the bills or if you've been stressed about money before, that savings account feels like bumpers at the bowling alley.
It's hard to part with that money!
But, if you've accumulated some debt, your money in your savings could be working for you.
Here's a few questions to ask yourself before you tap into your hard earned savings account:
1. How much money is in your savings account?
It used to be that $1000 would be a good solid base for an emergency savings. I'm not sure if you've had an "emergency" lately, but $1000 isn't going to cut it.
We had to replace the tires on my car and it came in close to that!
Now I recommend $3000 to my clients as a good base and there are a few reasons.
Number 1: $3000 will cover most typical emergencies. Not ALL, but you can't possibly plan for ALL emergencies.
Number 2: a savings account is not the only place you should have money to pull from.
First and foremost - if you haven't put your emergency savings money in a High Yield Savings account, do that now! You're missing out on extra moula. It's not much these days (returns of about 0.5%) but it's better than a typical savings account at 0.04% wouldn't you say?
2. How much debt do you have?
If you have a small amount of debt, it's usually much easier to part with some savings knowing that you can probably replenish your account quickly. The faster you can make that debt go away, the more your money can work for you!
But if you have a mountain of debt - the kind of debt that just weighs on you and makes you feel like you can't get out from under it, there's a strategy for tapping into your savings.
I believe it's always worth putting some money towards your debt so that the interest doesn't keep growing. Have you ever looked at your mortgage or student loans? The amount you took out is never the amount you will have paid in full by the end of the term. Interest accrues quickly.
What worked for me and what has worked for my clients is a split of 45/45/10. After you have a $3000 base, take the rest and split it up. Forty-five percent can go towards paying a debt, forty-five percent to investments and ten percent to fun.
Because trust me, if you aren't allowed to have any fun while you're paying down debt, you won't stick with it!
Doing it this way, consistently every month creates new habits and quick wins so you'll want to keep going.
Now of course, everyone's situation is different - if your job is on the out or you know you're about to lose your health insurance, you have to evaluate what kind of cash you need access to in the next few months.
So before you go allocating those funds to debt, take a look at what you might be up against.
3. Don't wait to invest!
Most people I talk to believe they have to wait until they've paid down their debt to invest. But here's why investing while you pay down debt is important:
You can still access some of your investment contributions if you need extra money in an emergency.
Investment service M1 Financing actually allows you to borrow against any contributions you've made to your investments. They loan that money to you at 2% interest and BAM look at that extra money you have to pull from if you need more than $3000 for an emergency.
Now of course that 2% is costing you more than if you had say $15,000 sitting in a high yield savings account, but it's an emergency right? Something that doesn't typically happen, and in this case, you have access to money if you need it. Then you're really just paying yourself back with a little bit of interest.
You may also be able to borrow your contributions you've made to your taxable brokerage (read, not your retirement account) without penalty so this can serve as a type of emergency fund as well if you've been investing at all. *Pay attention to capital gain rules in your state and per your specific account type.
So you might as well put your money to work!
Have you caught my drift yet? No matter where you are, if you haven't started investing, START! It's the best thing you'll ever do.
At the end of the day, what I want for you is for you to feel like you know exactly what's going on with your finances. This is about decreasing your stress and empowering you to take the reigns on your money because no one else is going to care as much as you do about your finances. No matter where you are now, you have the opportunity to change that and for your finances to look completely different in the next 365 days.