When you start getting your finances in order, your first order of business is usually to start an emergency fund.
Emergency funds are so vital to financial wellness, because without them, it’s pretty difficult to make any significant progress. An emergency fund essentially provides a buffer so you aren’t completely derailed from your financial goals when unexpected expenses happen.
There is no one-size fits all amount to dictate how big your emergency fund should be. That being said, you will often hear financial experts advise to sock away 3 to 6 months of expenses in an emergency fund.
Needless to say, it can take some time and dedication – and perhaps a side hustle – to fully stock a 3-6 month emergency fund. And once you finish saving, you may wonder what to focus on next?
Here’s what to do once you have an emergency fund.
Bulk It Up Even More
Okay, okay, I know what you’re thinking. You just finished saving for your emergency fund and you’re ready to move on. But hear me out!
With the COVID pandemic, thousands of businesses have been forced to close and layoff their workers. Millions of people have lost their main income source.
Now, while a pandemic isn’t necessarily going to happen every year, it did prompt us to wonder: Is a 6 month emergency fund truly enough?
You may want to consider what we call a “jumbo emergency fund”, which can cover 12 months of expenses. Not everyone needs a jumbo emergency fund, but there are certain cases where it may be an ideal solution.
For instance, if you have one income for the family, you don’t have the buffer of a spouse’s income, so you may want to save more for a rainy day. Further, you may want to bulk up your emergency fund even more if you have a variable income, significant health issues, or a large family.
And let’s be honest…does it really hurt to have extra emergency savings? The peace of mind may be worth it.
Pay Off Credit Card Debt
Once you are content with your emergency fund, your next step is to focus on paying off credit card debt.
Credit card debt typically has an extremely high interest rate, so it should almost always be the first debt you prioritize paying off.
Credit card debt can be challenging to pay off, but with some creativity and persistence, it is totally possible. If you find yourself in credit card debt, one thing you may want to consider is using a personal loan or a 0% balance transfer card to help lower the interest rate, which allows a higher percentage of your monthly payment to go towards the principal balance of your debt.
Save in an HSA
An HSA, or Health Savings Account, is a relatively new savings vessel. You may be thinking “isn’t an HSA an insurance thing?” Yes, it is, but it is also an opportunity to save money.
If you are on a High Deductible Health Plan, or HDHP, you are typically eligible to contribute to an HSA. In order to be better prepared to deal with the high deductible that comes with an HDHP, the IRS allows you to save tax-free dollars to pay for eligible medical expenses.
The best thing about HSAs is the amount you save rolls over from year to year. So, if you don’t end up needing to spend the money on related medical costs, you can keep growing your fund. As it grows, it is kind of like having a separate medical emergency fund. There is no “end date” for an HSA: the money is yours forever, regardless of changes in employment or insurance.
Of course, since it allows you to save tax-free dollars, the IRS has to put parameters around how much you can save in an HSA. For 2020 the IRS has set contribution limits for HSAs to $3,550 for an individual or $7,100 for a family. For those over the age of 55 there is an opportunity to contribute an additional $1,000.
It also acts as a retirement account, which may sound odd but is actually a really great perk. Read more about that in our Health Savings Account Guide
Save for a Big Purchase
Want to save for a down payment on a house? Travel? Save for a wedding?
Once you have a stocked emergency fund, it’s a perfect time to transition to focusing on other savings goals.
Whatever you’re saving for, make sure you are making your money work for you by putting it in a high-yield savings account. Typical banks pay pennies in interest. High-yield savings accounts have much higher interest rates than checking accounts or even other savings accounts, so your savings will continue to grow over time.
Pay Off Student Loans…the Right Way
Not all student loans are created the same, so you’ll want to do your due diligence before you start paying them off.
For instance, if you work for a qualifying employer, such as the government or certain non-profits, you may qualify for Public Service Loan Forgiveness. If you qualify for forgiveness and your debt is big enough to justify pursuing it, you will want to pay as little as possible towards your student loans to maximize forgiveness. Otherwise you are paying back money that otherwise could have been forgiven! That money can instead be used to pay down other debt, save for a down payment on a house, or invest in the stock market.
And if you have private student loan debt, there’s a good chance you can benefit from refinancing your loans. Private student loans usually have a higher interest rate – sometimes 10%+ – so by refinancing to a lower interest rate and save hundreds or even thousands of dollars. You can receive free rate quotes to see if you would benefit from refinancing.
To easily consider your options, grab our free student loan spreadsheet, which will help you track your debt repayment progress, provides you useful calculators, and helps you understand whether you would benefit from moving to an income-driven repayment plan.
Invest
Many experts recommend that you prioritize investing when your debt is at or below 5%. One exception is a company 401k or 403b retirement match. If your employer is matching contributions and you aren’t contributing at least to the match amount you are leaving “free” money on the table. This is part of your overall compensation package at your job, so take full advantage of it!
If you are contributing to the company match on your retirement account – if you have one – and your debt is below 5% interest, it makes sense to start investing. You can do this through a retirement account like an IRA, 401k, 403b, or some combination.
You can also invest in a non-retirement account. The benefit of investing here is that you have access to this capital before retirement, so it adds another layer of security on top of an emergency fund. It can also be used for future large purchases, such as a vehicle or house.
One easy way to get started investing is to sign up for a free SoFi Invest account. If you fund your brokerage account with $1,000 to start you will receive $50 of your favorite stock as a welcome offer.
Track Your Net Worth
While tracking your net worth isn’t necessarily a savings goal, it’s a good thing to start doing once you have stocked your emergency fund.
Your net worth is essentially a snapshot of your overall financial well-being. You compare your assets (such as savings or property) to your liabilities (like debt) to see your overall worth.
Keep in mind, if you have credit card debt or student loan debt, you may have a negative net worth. That’s okay – it will increase as you pay off your debt and increase your savings.
You can track your net worth for free using a tool like Personal Capital which has an online dashboard or a more traditional spreadsheet (my preferred approach).
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