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Four Ways to Invest Extra Cash in Your Savings Account

investing-my-money | Read Time: 3 minutes

By Balaj Singh, CAIA® | Published: August 2021


Last year, many Americans stockpiled cash to prepare for the uncertainty of the COVID-19 pandemic. So much so, the personal savings rate for Americans reached record levels. The U.S Bureau of Economic Analysis (BEA) reported that the savings rate for Americans was up to 33% in April 2020, the highest ever reported by the BEA.1 Coming into 2021, the savings rate for Americans has come down as the economy reopens with consumers unleashing pent up demand. However, even with higher spending compared to 2020, Americans continue to exhibit elevated saving rates compared to pre-pandemic levels.

While it may seem prudent to maintain excess levels of cash in a savings account, there are also opportunity costs to consider by keeping extra cash on hand. Most importantly, one should review the yield that can be generated in a savings account. The rate of return in a savings account (even a high yield savings account) continues to be below the historical average and is unlikely to keep up with inflation. These additional reserves are not even able to keep up with their purchasing power and end up losing value in the long run. Instead of letting funds on the sideline go underutilized, there may be more practical solutions for this cash to optimize overall return.

Maximize 401(k) and IRA contributions
First and foremost, maximize contributions to your retirement plan offered by your employer. While one can’t fund a 401(k) from their savings account, it may make sense to get less take-home pay by increasing the amount deducted from your paycheck. Money pulled from take-home pay and put into a 401(k) lowers taxable income. If you do not participate in a 401(k) or another qualified plan, contributions to a traditional IRA may also be tax-deductible.

Contribute to Health Savings Account (HSA)
Another investment vehicle that potentially could be a home for additional funds is a Health Savings Account (HSA). HSAs let an individual make annual contributions toward health costs and offer significant tax perks. Some of the advantages of an HSA are:

  • Contributions to an HSA are federally tax-deductible, reducing your taxable income.
  • Both contributions and earnings grow federal tax-free
  • Withdrawals for qualified out-of-pocket medical expenses are also tax free — whenever one takes them, no matter their age.

Pay down debt
Outside of investing surplus cash, paying down outstanding debt is another way to reduce the opportunity cost of excess cash. Making some advance payments on obligations, such as credit card payments and car loans, could be an efficient way to save on interest and fees. Paying off debt ahead of schedule allows someone essentially create a rate of return. To illustrate this, if there is an annual interest rate of 5% on a loan and one can manage to pay that loan off 12 months ahead of schedule, this individual has just locked in a return of 5% on their money.

Review existing plans
You might also want to take this time to review your risk management plan as well, including things like auto insurance, life insurance, and disability insurance. If you need more coverage, you can use your extra funds to get the coverage in place that you need.

If you feel like the you are in a position where you are uncertain on how to maximize your extra savings, you should take the time to really think about your larger goals and how you can use money to achieve them. Investing your money in the stock market can help you reach your longer-term goals more quickly. Though it carries more risk than keeping cash in a savings or money market account. It may be beneficial to partner with a financial advisor to analyze your goals and design a portfolio that are you comfortable with to steer through this market environment.

1 U.S. Bureau of Economic Analysis. Personal savings rate retrieved from Federal Reserve Bank of St. Louis.

About the Author – Balaj Singh, CAIA®
Balaj Singh is a Research Analyst on West Capital Management’s Research Team and supports West Capital Management’s Investment Committee. Balaj is responsible for investment due diligence on managers and strategies, portfolio construction, and performance reporting. Balaj graduated from Rutgers University with a Bachelor of Science in Finance and Accounting with a Minor in Economics. Balaj has earned the CAIA® Designation and is currently a Level III Candidate in the CFA® program.

This communication is provided by West Capital Management (“WCM” or the “Firm”) for informational purposes only. Investing involves the risk of loss and investors should be prepared to bear potential losses. Past performance may not be indicative of future results and may have been impacted by events and economic conditions that will not prevail in the future. No portion of this commentary is to be construed as a solicitation to buy or sell a security or the provision of personalized investment, tax or legal advice. Certain information contained in this report is derived from sources that WCM believes to be reliable; however, the Firm does not guarantee the accuracy or timeliness of such information and assumes no liability for any resulting damages. Any reference to a market index is included for illustrative purposes only, as it is not possible to directly invest in an index. Indices are unmanaged, hypothetical vehicles that serve as market indicators and do not account for the deduction of management fees or transaction costs generally associated with investment products, which otherwise have the effect of reducing the performance of an actual investment portfolio.

WCM is the business name of WSFS Capital Management, LLC. It is an SEC registered investment adviser that maintains a principal place of business in the Commonwealth of Pennsylvania. The Firm may only transact business in those states in which it is notice filed or qualifies for a corresponding exemption from registration requirements. For information about WCM’s registration status and business operations, please consult the Firm’s Form ADV disclosure documents, the most recent versions of which are available on the SEC’s Investment Adviser Public Disclosure website at WSFS Capital Management, LLC, is a wholly owned subsidiary of WSFS Financial Corporation.


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