We're all supposed to have savings on hand for a rainy day. In fact, a good rule of thumb is to have the equivalent of three to six months of essential living expenses in a savings account earmarked for emergencies. That way, if you lose your job or something major breaks in your home, you'll be able to deal with that situation without being forced into debt.
But many people are glaringly behind on their savings. In fact, the Federal Reserve Board found last year that 39% of Americans didn't have enough money in the bank to cover a $400 emergency. If you're part of that statistic, you'll really need to make an effort to fill up your savings account as quickly as possible. On the other hand, if you already have a healthy level of savings, you may be wondering what to do next. Here's what to do if you've already accumulated your first $5,000.
1. Assess your emergency savings needs
While $5,000 is certainly an impressive amount of money to have in the bank, it may not be enough to constitute a true emergency fund. Let's imagine you typically spend $2,500 a month on rent, transportation, food, medication, utilities, and other necessities. If you're sitting on $5,000 in savings, it means you only have enough money to cover two months of expenses, not three or more. And if that's the case, you should keep adding to your savings account until you reach at least $7,500.
2. Move on to long-term savings
Let's imagine you live pretty frugally -- you share a cheap apartment with two roommates, you live in a walkable city so you spend virtually nothing on transportation, and you clip grocery coupons like nobody's business. If so, you might only spend $1,500 a month on essential expenses, so $5,000 is enough for your emergency fund. You can then move on to long-term savings -- namely, funding an IRA or 401(k) plan through your employer.
Retirement may seem far off, but you'll need to save independently to ensure that you have enough money to live comfortably as a senior. And while your near-term savings should definitely take priority, if your emergency fund will see you through, you can focus your extra money on building a nest egg for the future.
3. Start investing
The money you have in your savings account will probably pay minimal interest, especially given today's rates. On the other hand, if you open a brokerage account and invest some of your money there, you'll have a chance to grow it into a much larger sum. Once you're set with your emergency fund and are on track with your retirement savings, you can invest additional money in a brokerage account, where you can buy stocks or mutual funds with the potential for substantial returns.
Of course, there's risk involved in investing, which is why you'll need to be secure with your emergency fund before you do it. But ultimately, you stand to accumulate a lot more wealth in a brokerage account or retirement plan (which also gets invested) than you do in a traditional savings account.
If you're the proud owner of a $5,000 savings account, congratulations -- that's an impressive feat. But don't assume your work is done. You may need more money than that to cover yourself for emergencies, and even once that goal is accomplished, you should still strive to keep investing and saving for retirement. The good news is that you can employ the strategies you used to save your first $5,000 to save your second $5,000, and a lot more money after that.
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