I have urged the importance of the Peace of Mind account, emergency account, whatever you want to call it. The reason being is that is provides you security and a means to fund inevitable unexpected expenses without having to disrupt your lifestyle.

What do I mean by disrupt your lifestyle?

You don’t have to put the expense on your credit card and rack up interest charges as a result of not being able to pay it off in full. Or you won’t have to reduce your current spending or have to sell your investments as a means to afford said expense. You will have the funds available, liquid and ready for use.

If That’s Not Peace of Mind, I Don’t Know What Is.

But now I’m going to rock the boat a little. It’s important to have a significant amount of cash on the sidelines so that you have that peace of mind and the security you need. But it IS possible to have too much in your savings account.

There are some individuals who have created a comfort and discipline around building up their savings account. It feels safe and it’s a fun exercise to watch it continually increasing as a direct result of their proactive savings.

Saving is fantastic. It shows a real discipline around your money habits and it should not be discounted.

But a savings account right now is earning anywhere between 0.01% – 0.50%.

A minuscule amount that will not create wealth for you over time and will not even grow at a rate big enough to keep up with inflation. Meaning its buying power will continue to diminish.

I am proud of you that you have made it a priority to save. This is wildly important! But now its time to create new habits, expand on your current discipline of saving and grow as a financial expert in your own financial journey.

Let’s explore how your money could be doing more for you.

Ok, I’ll Admit It. I Have Too Much In My Peace of Mind Account. So What’s Next?

If this is you, if this speaks to you in any way….the time is now to start considering the idea of investing more.

I am in no way saying to invest your savings all at once. For heavens sake you have been saving for months or years and have been hoarding this cash, let’s take it one step at a time. Investing it all day 1 would be both intimidating, overwhelming and frankly not something I would suggest as a prudent financial decision.

With that said, below are the factors I would be considering before I started investing more and the steps I would take to move forward if I had a significant amount saved in my savings account.

Two Things to Consider Before Investing More

Determine How Much you need in your savings

Determine how much you really need long term in your peace of mind account to allow you to sleep easy at night.

• My recommendation would be to have anywhere between 4-6 months of your monthly expenses saved in a savings account. 
• OR, if you are saving for something specific like a down payment on a home, a car purchase or vacation, etc. I would consider keeping this in your savings account if your plans are to use the funds within 2 to 3 years.
  
  

Assess Your Debt Situation

• Write down all of your existing debt, noting the amounts outstanding with their corresponding interest rates.
• Ensure that you have created a streamlined pay down process, especially for high interest bearing debt. Think student loans or credit card debt. If your interest rate is over 5%, consider using your excess savings to pay debt down first. Consider paying down based off of highest interest rate – not the lowest amount outstanding.
  
  

After you have assessed how much you truly need in your peace of mind account and have created a game plan for your high interest bearing debt, here are the next 3 steps I would take to determine how to move forward when you have found yourself in this wonderful predicament of having too much in your savings…

My Suggestions For Excess Savings

If You Are Income Eligible, Consider Maxing Out a Roth IRA

Learn more about the Roth IRA and why I love them in a past blog post by clicking here.

There is no other investment vehicle out there that offers tax free growth and tax free withdrawals at your discretion upon retirement, like a Roth IRA. Tax free growth will have a meaningful impact on your account balance over time.

If you are income eligible, this is where I would invest the excess amount of savings first.

I’ll say it again for the people in the back….Tax FREE growth and withdrawals.

Focus on Your 401K

In addition to option 1 or if you are no longer income eligible for a Roth IRA, you can leave your savings account as it is. Instead of focusing on what to do with the bulk of cash, you have the option to redirect your energy on your cash flow coming in.

In other words, start increasing or maxing out your 401K contributions. You will have less money coming into your bank account on a monthly basis, which will no longer provide you the opportunity to save in your savings account, but rather redirect what would be your savings to your already opened 401K retirement account.

For many of us, this account is already opened, we are already contributing to it – let’s up the ante and contribute more per paycheck.

The benefit to you is the following:

1. You will be automating this process making it easier for you to sustain
2. You will receive preferential tax treatment.
   1. Traditional 401K – Tax deferred growth and will reduce your taxable income in the year of contributions
   2. Roth 401K – Tax free growth and withdrawals
3. You will be saving in one of the most powerful retirement investment vehicles available to you
   
   
   

Open A Taxable Brokerage Account

If you have exhausted the above options and maxed them out and you are still looking for ways to invest more, you may open a taxable investment account. You are able to open an account like this at any brokerage firm like Vanguard, Fidelity, Charles Schwab, Merrill Edge, etc.

The difference between this account and the other retirement accounts is….

1. It’s taxable. Any dividend/interest income generated in the account will be taxable to you in that year. Also, any sales of securities will also be taxable to you.
2. It’s flexible. You are able to contribute and withdraw funds at your discretion. There are no income limits, contribution limits and age requirements.

Once you have determined how much you are comfortable investing in a separate investment account, you have the option to invest it all at once or to dollar cost average into the market.

I Always Opt for the Dollar Cost Average Approach

This will be entirely up to you, but I have always been a firm believer in dollar cost averaging. The process of investing in certain amounts at specific intervals throughout the course of the year.

I don’t know about you, but if I just spent years saving, emotionally I would want to create a manageable strategy to invest rather than transferring all the cash at once to be invested.

So here is what it would look like:

You need $16,000 in your savings account, but you have $40,000 right now. You would create a strategy to invest that excess of $24,000 over the course of 12 months by investing $2,000 per month on, let’s say, the 1st of every month.

It creates a habit and a discipline similar to that of your savings.

Doing something different than you have always done is nerve wracking. But you will only go to greater heights by taking it to the next level.

Expand on your current financial situation and consider investing that excess savings! 

If you have questions about the process or are unclear about how to get started, please schedule a call with me to discuss your options further.

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Past blog posts that may be helpful for you as a follow up.

What Types of Accounts Can You Invest In

All About Roth IRAs and Why I Love Them