Let’s be honest, 2020 wasn’t exactly gracious with our plans. From vacations to weekly evenings with friends: a lot was simply no longer possible. But that also meant that many people suddenly saved all the money they would otherwise have spent.
As spending has fallen, many have put their money in savings accounts. For example, data from the US Federal Reserve Bank of St. Louis shows that savings rose 7.1 percent between February and April 2020. In the same period of 2019, the monthly increase was only 1 percent.
With the pandemic continuing in 2021, it’s worth thinking about how best to use this extra money. Financial planner John Bovard from the consulting firm “Incline Wealth” has often dealt with this question in the spring of 2021: “At the end of the year meeting with my customers, all but one asked: ‘What should I do with the additional money I have?'”
Here you can find out what Bovard advised his customers:
Create an emergency fund or fill it up
Before you invest the money in anything, Bovard says there are a few other things you should do first. Many of his customers have already replenished and expanded their emergency funds. But a full emergency fund should be the first step for anyone who doesn’t already have one. In general, financial planners recommend putting aside between three and six monthly expenses as a nest egg, for example in a daily money account.
Pay back high-yield debt
After that is done, he recommends turning your attention to credit card debt. Paying off credit card or other high-interest debt should take precedence over investments.
With an average credit card interest rate of 14.5 percent and an average stock market return of about nine percent every 10 years, this debt can cost you more than your investments bring in.
Set up an automatic deposit
After you’ve checked the above steps, Bovard suggests setting up a regular, automatic deposit as an investment. “I love automatic monthly deposits into an investment account. This can be one of the easiest ways to build a fortune over the long term, ”says Bovard.
Markets have seen extreme ups and downs during the COVID-19 pandemic. Investing money in them regularly could help smooth out these extremes in the long run. This strategy is also called “dollar-cost averaging” and is very popular among financial planners. With this strategy, the same amount of money is always invested over a certain period of time. “It’s best to set this up as a monthly contribution that’s automatically invested,” says Bovard.
A second benefit of these deposits is that they continue to run indefinitely and effortlessly, even if life returns to normal at some point. “When the money is automatically deposited, it’s in the account before it can be spent, making the magic of compound interest possible over time,” he says.
This text has been translated from English. You can find the original here.