Have Savings from the Pandemic? Here's How to Maximize That Money

• Author: Jacob Greene
• Posted: 2024-08-15

Though many unfortunately saw significant income drops due to the COVID-19 pandemic, others remained employed during the crisis. Even for those who became unemployed or underemployed, boosts to the amount paid out in unemployment cash soared due to various bills passed by Congress. These raises usually amounted to anywhere from $300 to $600, plus the amount provided by the state.

If you were one of those lucky people who could stack up savings during the pandemic, here's how you can make the most of your money.

The Best Strategy Depends on Your Age

Like most financial decisions, the wisest choice will largely depend on how old you are. For those in the 55+ range, your best bet is to deposit the money into a retirement account. If you have a 401(k) plan from your workplace, ensure that you max out your contributions.

On the other hand, for younger workers, this is a great time to venture into some kinds of investments. For instance, if you're able to save up 20% of the purchase price of a new home, it could be a unique opportunity to get a mortgage and dodge pricey Prime Mortgage Insurance.

Lower Your Tax Liability

Some types of savings accounts can reduce your Adjusted Gross Income, the amount of income on which you're taxed. Keep in mind that state income tax rules on whether each type of account subtracts from your state AGI vary widely.

It's important to differentiate between pre-tax and post-tax investment accounts. For those early on in their careers who expect to earn far more later on, a post-tax account may be a better choice. This type of savings account requires you to pay income tax on the money you put in them. However, investments within these accounts that appreciate in value over time can be taken out without tax needing to be paid on them.

If your income is around the highest you think it'll ever be, a pre-tax account is a good idea. An Individual Retirement Account (IRA) or 401(k) could be helpful. On these accounts, you lower your AGI by however much you contribute. That means you pay less tax the calendar year in which you contribute money to these. The downside of these is that you will pay income tax on distributions from them.

Don't Get Ripped Off

Traditionally, financial advice for those with extra money has been to put it in savings accounts. Before the COVID-19 pandemic, interest rates on savings accounts were already very low compared to what they've been historically, usually not even beating out inflation for the year.

There are "High-Yield Savings Accounts" (HYSAs) that are usually from online bankers that promise to give you higher-than-average APYs on your savings. However, at the time of writing, it's uncommon for this rate to be greater than 0.4% per year. On the other hand, stocks in most industries have been continually soaring upwards.

Of course, when you deposit money into an FDIC-insured HYSA, you're guaranteed to not lose anything. You have to accept volatility and that you may even lose money if you invest in stocks. Unless you have significant experience in the industry, you should consult an investment advisor before gambling on stocks. For some individuals, this can be the key to growing money.

Get on the Right Track

One of the most difficult things to do when you have money in-hand is to save it. While spending can provide immediate gratification, saving it will help to provide longer-term security.

Rather than just depositing money into a general savings account, consider making a few different savings accounts. First, you should make an emergency savings account that should only be tapped in the case of an emergency. This should generally have between three and nine months worth of savings, depending on what stage of life you're in. Second, you should create a few goal-oriented accounts. If you take a yearly vacation, consider putting a set amount of money away so that you don't have to suffer through sticker shock yearly. Finally, set up accounts for your kids to enjoy as they get older, if applicable.

Wrapping Up

Like most things, saving money during the post-COVID era is anything other than traditional. With some informed and creative solutions, you can multiply your money!