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Where to Stash Your Cash to Maximize Your Savings

How much savings you can accumulate is one of the biggest factors to achieving financial independence. But where do you keep your savings to get the best bang for your buck? Keeping everything in a regular savings account that barely earns any interest will add years to your journey of achieving your financial goals. I’ll share where we stash our cash to maximize our savings and get to financial independence sooner.

Where to keep your money to maximize your savings

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Emergency fund in a high yield savings account

We keep at least $15,000 in a high yield savings account. Most savings accounts only earn .01% interest while a high yield savings account earns more than 1%. Yes, 100 times more. Do you want to make $1.50 in interest or $150? Most high yield savings accounts are online which is not a big deal because it doesn’t take much time at all to transfer money to your main bank account in an emergency. Keeping our emergency fund in a separate account that lives online also helps us keep a bit of a barrier from our main everyday account so that we don’t access it unless it’s truly an emergency. My favorite high yield savings accounts is at CIT bank and earns 1.55%.

Contribute enough to your 401k to get the company match

If your employer offers a match on your 401k, take it. That is free money. So if they offer a match of up to 3% of your contributions, try your best to contribute 3% to get that match! Getting those extra funds in your retirement account is especially important in the early years of your career so that you have a bigger starting pool for compound interest to work its magic.

Let’s say your employer is willing to give you a match of up to $2,000. If they contribute that to your 401k each year and your account makes 9% each year (around the average return of the S&P 500), just their contributions alone will total over $300,000 in 30 years. But if you don’t contribute up to their match offer, you’re leaving this money on the table. Plus, the money that you contribute is tax-free until retirement if you have a regular 401k. If you have a Roth 401k, you are taxed on your contributions now, but you are able to withdraw the money tax-free in retirement.

Where to keep your money to maximize your savings

Max out your IRA each year

After you’ve contributed enough to your 401k to get the company match, put your next savings dollars into an IRA. Why not just keep contributing to your 401k? Well, you certainly could, but generally 401k accounts have higher fees and fewer options than you could get in an IRA at a brokerage firm.

As of 2018, the per person limit for IRA contributions is $5,500. My husband and I both try to max out our IRAs each year for a total contribution of $11,000. Sure, we make sacrifices to make this happen, but saving for retirement is one of the smartest things you can do.

We are big fans of passively managed index funds because they have much lower fees than actively managed funds, and they actually outperform actively managed funds more often than not!

The compound annual growth rate of the S&P 500 from 1928 to 2015 is 9.5%. So let’s assume that we expect a 9.5% return on the money we are saving for retirement in our IRAs. (For my personal planning purposes, I use 7% which helps account for inflation, but we’ll ignore inflation for this example). If we contribute $11,000 each year and get a 9.5% annual return, we’ll have over $1.87 million in 30 years. WHOA. What if you are single or can only save $5,500 each year as a married person? With a 9.5% return, you’d still open up your retirement account in 30 years to see a balance of over $939,000!

Like 401k’s, IRAs come in both Roth and traditional flavors. If you contribute to a traditional IRA, you will not pay taxes on your contribution (you will receive a deduction for your contribution amount when you file your taxes). You will pay taxes on the money when you withdraw it in retirement, however. If you have a Roth IRA, you are taxed on your contributions now, but you are able to withdraw the money tax-free in retirement.

Where to start an IRA? I recommend using a firm like M1 Finance because they are comission-free, offer inde funds, and allow you to completely automate your deposits and portfolio.

Contribute to a health savings account if you are eligible

Certain high deductible health insurance plans allow you to contribute to one of the best accounts ever: the Health Savings Account. What is so wonderful about it? Money you put into it is tax-free, and it’s also tax-free when you take it out for medical expenses. And you can use this money at any time, not just in retirement. It’s virtually the only money that you won’t have to share a portion of with the government! Many health savings accounts have an investment option that allows them to grow and compound so that you can accumulate quite a medical nest egg.

Where to keep your money to maximize your savings

Finish maxing out your 401k

Still have extra cash to stash? Maxing out your 401k will save you a bundle in taxes. Remember, a regular (non-Roth) 401k is tax-free now, and you will pay taxes on the withdrawals in retirement. If a couple both maxes out their 401k’s to the 2018 limit of $18,500, that’s $37,000 they won’t be taxed on each year they max out those accounts.

Contribute any extra savings to a regular brokerage account

Are you a super saver or high earner that still has a bit more to stash away even after contributing to an IRA, 401k, and HSA (if eligible)? Or maybe you have already maxed out your IRA, but aren’t eligible for an HSA and don’t have access to a 401k. No worries, you can still amp up your portfolio by contributing to a regular brokerage account. You won’t get a tax break like some of the other options, but it will still help your money grow and help you achieve financial independence. And unlike IRAs & 401k accounts, there is no penalty if you withdraw before a certain age, so it’s perfect for people working toward a goal of early retirement. Again, pay attention to the fees you’re being charged and choose a commission-free firm like M1 Finance.

Where to keep your money to maximize your savings

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