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Reaching a savings milestone of $100,000 is an impressive achievement, reflecting your commitment and financial discipline. However, after celebrating this accomplishment, many individuals face uncertainty about the best way to manage and allocate these funds.
It’s common to feel a mix of excitement and apprehension when contemplating the next steps for such a substantial sum. Without a clear guide, deciding what to do with your savings can feel daunting, yet there are effective strategies to help prioritize your financial decisions.
If you have any high-interest debt, it’s crucial to tackle that first. This includes debts like credit cards with interest rates often exceeding 21% or personal loans averaging over 12%. Paying off this debt should take precedence because the return from investments is unlikely to surpass an interest rate of 6%. You will find that it’s challenging to earn enough from investments or savings to outweigh the cost of carrying high-interest debt.
Read more: What’s more important: Saving money or paying off debt?
Adopting the mindset of “hope for the best, prepare for the worst” is wise when managing your finances. Setting aside funds for an emergency fund is a proactive step. Such a fund can help you tackle unforeseen expenses—like unexpected car repairs or medical bills—without resorting to additional debt or disturbing other financial plans.
A flexible savings account generally serves as the best home for your emergency fund, allowing quick access to your money when needed. However, you might also consider higher-yield options such as a high-yield savings account (HYSA) or a money market account (MMA) to maximize your earnings on these funds.
Read more: The 4 best (and worst) places to keep your emergency fund
After establishing your emergency fund, the next logical step is to create sinking funds for anticipated expenses. Sinking funds can be earmarked for various future costs, such as:
Vacation
Wedding
Childbirth/maternity leave
Down payment on a car or home
Home renovation
College tuition
Planned medical procedure
Business taxes
Since these funds are not needed immediately, consider placing them in a time deposit, such as a certificate of deposit (CD) or Treasury bills. These options typically offer better interest rates in exchange for committing your money for a set period.
Read more: What is a sinking fund, and why do you need one?
Once your immediate and medium-term savings goals are secured, it’s time to think about long-term growth—typically through retirement accounts. The optimal retirement account for you will depend on individual circumstances, so consulting a financial advisor can be beneficial. A common approach is to maximize contributions to a 401(k) or another employer-sponsored retirement plan, and if additional savings remain, consider a traditional IRA.
Utilizing these retirement vehicles allows you to reduce your taxable income while benefiting from compound interest over time.
For those looking to contribute for the 2024 tax year, contributions can be made until April 15, 2025. The following are the maximum contributions for these accounts:
2024: $23,000
2025: $23,500
2024: $7,000 (under age 50), $8,000 (age 50 or older)
2025: $7,000 (under age 50), $8,000 (age 50 or older)
Catch-Up Contributions (for ages 50 and older)
401(k): Additional $7,500 for both 2024 and 2025
IRA: Additional $1,000 for both 2024 and 2025
Read more: Retirement planning: A step-by-step guide
Source
finance.yahoo.com