my two cents
By Charlotte Cowles, the Cut’s financial-advice columnist. In addition to “My Two Cents,” she writes about work and parenting for the site. Previously, she was the senior features editor at Harper's Bazaar and a senior editor at the Cut. She was also the editorial director for MM.LaFleur. Her work has also been published in Glamour, Art in America, Politico, and other places.
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Dear Charlotte,
I feel guilty saying this, but I actually saved a lot of money this past year. My job allowed me to work from home, so my income was the same. But because I was making all my own food, was not commuting, and didn’t do most of the normal stuff I spend money on, my savings added up a lot. (It also helped that I stopped paying my student loan bills when the government froze them.) I currently have about $20K saved up, and I’m trying to figure out what to do with it. I’ve never been good about saving money, and I didn’t really have an emergency fund until now. Should I keep it in cash, just in case? Or should I put it toward my student loans (about $25K)? I don’t even know where to start with investing it, if that’s a good idea. I’d like to do something responsible that will help me in the long-term, and I’m not sure what that is.
This is all good news, but I understand why you’re conflicted. It’s a weird time to have more money than ever before. You’ve probably heard the pandemic economy described as K-shaped: Roughly half of Americans are in dire financial straits (the bottom prong of the “K”), while many others are actually doing quite well (the top prong) for the reasons you described. Obviously, it’s preferable to be in your camp. But how do you make the most of this new financial wiggle room, especially when there’s still so much uncertainty?
To figure out your best path forward, I called Shannon McLay, a financial advisor and the CEO of the Financial Gym, a membership-based financial-services firm. “A lot of our clients are in the same position — they have a lot of savings from the past year, but they aren’t sure what to do with it,” she said. “The bigger question is, What are you saving for? You want to define those goals. If you’re just trying to save money generally, it’s hard to stay committed in the long-term.”
For starters, you’re right to focus on shoring up an emergency fund. But that doesn’t need to be an amorphous, “whatever you can spare” amount — get specific about what you need. The rule of thumb is that it be enough to support you for three to six months, at least. If your industry is more volatile or your job may be in jeopardy, you will want to err on the careful side (i.e., budget for a six-month cushion or more). But if your position is secure and/or you have other safety nets, such as family members you could move in with easily if things got hairy, then you can probably aim for three months’ worth of expenses instead. McLay recommends that you put that cash someplace where you can access it if you need to but won’t be tempted to dip into it otherwise. A high-yield savings account is a good idea.
I’m sure you have other goals besides guarding against hypothetical disasters, though. And that’s the tricky part of money management — you have to multitask. It’s also the fun part because you get to think about what you want. “It’s important to set savings goals that are unique to you, and that make you excited,” said McLay. “A lot of our clients ask, ‘Shouldn’t I pay off student loans or save for retirement?’ And those are worthy goals, to be sure, but who gets out of bed for that every day?”
Instead, McLay finds that her clients are motivated to manage all of their finances better — including the longer-term, unglamorous stuff like 401(K)s —when they’re planning for tangible, shorter-term objectives at the same time. “What makes you really happy?” she asks. “Is it travel? Is it a tattoo? Is it a puppy? If money wasn’t a factor, what would you want to have in your life?” The more research you do, the better. For instance, if you want to go to Portugal, find out the flight and other travel costs so that you know exactly how much to save up. “Then create a ‘Portugal fund’ so that it feels concrete,” she says.
Ideally, you want to choose a couple of tangible goals you can realistically accomplish within the next year or two. Then, start to look farther ahead. McLay likens this process to planning a road trip: If you’re living paycheck to paycheck, you can’t go far, so it’s pointless to map anything out. But if you have savings, you can start to think bigger — and that can be overwhelming. Creating a timeline for your goals is similar to charting your route and staying on track. The end point, of course, is being able to support yourself comfortably in retirement, but you can’t expect to drive straight there without stopping — you’ll need to refuel and visit friends and check out other sights along the way.
A word on your student debt: McLay (and many other financial advisors) believe you shouldn’t worry too much about it, provided the interest rates are low (as they are on most federal student loans) and you stay up-to-date on your bills. You’ve been wise to stall those payments this past year in favor of shoring up some cash; when the government starts collecting again (which is slated for January 31, although Biden is very likely to push that date back when he takes office), you should feel fine about paying the monthly minimums. I know it might feel counterintuitive to have a bunch of cash sitting in one place while you owe money in another, but remember that your savings also protect your ability to make your loan payments should something terrible happen and your paychecks dry up in the future.
(That said, if your student loans haunt you and there’s nothing you want more than to be rid of them, by all means, put some of your new savings toward paying down a chunk. It’s really a lifestyle choice — again, you’re driving here.)
As for investing: If you don’t have a 401(K) or other retirement savings yet, now is the time to open that account and start putting money into it. If you do have a retirement account, consider upping your contributions. Most experts recommend putting between 10 to 15 percent of your paycheck into your retirement portfolio. Automate your contributions so that you don’t even think about it. In fact, automate as much as possible! It’s way easier to be responsible with your money when you can get the internet to do it for you.
Once the world does open back up, it’s inevitable that you’ll return to some of your old spending habits, and you might not save at the same rate that you are now. (We may think we’ve gotten used to skipping bottomless brunch, but I bet it’s just as fun as we remember.) This is to be expected; make adjustments and don’t beat yourself up. But just because your cash flow will shift doesn’t mean your goals should fly out the window. You have a rare chance right now to think big and make strong decisions for your finances that will serve you for the rest of your life. It has been a horrible year, but you might as well make it worth something.
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