The year 2020 was supposed to be our best travel year yet! Many of us had awesome vacation plans set and savings goals in place to make these dream vacations turn into a reality. Speaking of reality… coronavirus happened.
If you’re lucky enough to have the choice of what to do with those 2020 travel savings, I’ve got you covered. There are lots of financially responsible ways that you can approach using up those funds you set aside for that trip you planned, but I’ll share my top 5 here.
Contribute To That Emergency Savings Fund!
There aren’t really many examples of events, aside from the spread of COVID-19, that recent generations have experienced first-hand and that have proven the importance of having several months of expenses saved up. Studies have shown that within a few months of the pandemic hitting the United States, American families were saving more than normal. This was out of necessity, of course, as unemployment surged and many Americans struggled to pay their rent and bills on time. While this was certainly nobody’s fault, it’s a fact that Americans who had several months of rent stored away in an emergency savings account were able to manage with less financial stress.
Having an emergency fund is a critical component of a sound financial plan and contrary to popular belief, there is no one correct number that everyone should aspire to save. Emergency funds should be at minimum one month’s worth of living expenses. To be slightly more comfortable with handling unexpected emergencies, it’s best to sock away 3-6 months of living expenses. Most experts say that 9-12 months is ideal for those who are extremely conservative. If you planned to take a $500 dollar vacation twice this year, then that means you may have set up a plan to save up $1,000. If you need that money to cover immediate needs such as housing, food, or bills then that’s where those funds should go immediately. But, if that’s not the case then you should consider adding those savings to your emergency fund in an attempt to beef it up as much as you can or until you feel comfortable with your pile of cash. One mistake that you should avoid is putting these savings in the wrong savings vehicle. Make sure that your savings account is at an FDIC-insured bank or NCUA-insured credit union, preferably one offering high-yield interest.
Pay Off High-Interest Rate Debt
The best investment that one can make is often argued to be paying off high-interest rate debt for several reasons. There are virtually no investments or savings accounts that can return 18% consistently over time. Yet, credit cards commonly charge 18% in annual interest if not more, depending on the credit profile of the borrower. Let’s say you have $100 and you can either choose to pay off a credit card with an 18% APR or invest the money in a well-diversified investment fund. The average return of diversified investment funds has historically been between 6% and 10% annually. Therefore, if your investment returns a 10% return on investment, that would be $10 earned. However, you’d still be responsible for paying 18% on the credit card bill. 18% of $100 is an $18 charge for interest fees. So your earned $10 from the investment would go towards debt and you would still need to contribute an additional $8 in fees to pay the 18% in full.
Of course, that assumes that you do not pay your credit card bill all year. This is not the case with most people, but the math still stands! If you instead put the $100 towards your debt right away to avoid being charged high-interest fees of 18%, then you’d end up with a profit of $0, but you will also not owe any money in fees either. Canceling high-interest debt in most cases is the best financial move over the long term. If the interest rate of your debt is very low, for example, a 2.45% interest rate federal student loan, then you would probably decide to use your dollars to invest rather than pay off that low-interest-rate debt right away.
Add More to Your Retirement Accounts
There is a sad statistic in America that most people working average jobs and planning to retire at 65 have no clue what their retirement account needs to have in it for a dignified retirement. Dignified retirement basically means that you can pay all your bills, your housing is not an issue, you can afford food and splurge from time to time on some nice things or on a trip – because after decades of working, don’t you deserve it? First off, the problem is that many of us are unsure how to calculate the amount of money we will need, then the next problem that comes up is not knowing how to get such a lump sum saved up.
Let’s start with the first issue. To know what you need for retirement, multiply your salary by 25. The average person makes about $50,000 a year and will need $1.25 million to retire comfortably. That sounds like an impossible number to many of us, but the truth is with a compound interest calculator like this one, you can come up with a few different plans of attack. One way to reach over a million dollars for retirement is to invest $260 every 2 weeks for 40 years (assuming a 7% return on investment). If you can start even earlier than you can afford to invest less money each month. But in reality, most people start investing when they get their first job, which usually happens at age 25 or so. Every dollar can go a very long way in your retirement planning. So, it’s important to set aside any spare amount you can as often as you can!
Create Sinking Funds
Have you thought about holiday shopping yet? I know, I know – it’s barely the end of summer, but this is the reason sinking funds can be a huge help! A sinking fund is a growing pile of money that you keep contributing to until you meet your goal. So, let’s say you set up a holiday shopping sinking fund of $1,000 by late November – that gives you plenty of time to do your holiday shopping. In order to meet that goal, you add $55.55 to a savings account each weekend and the account has no other purpose but holiday saving. By setting aside that money weekly, you’ll ensure that when you need the lump sum of money later, it will be readily available for you!
Most people who are not familiar with sinking funds could probably benefit tremendously because the human brain often compartmentalizes things anyway. Tasks we must do at home versus for work get separated in our minds the same way sinking funds separate the reasons we need to save money into various buckets. If you have money that you had intended to use on travel, you can definitely create new sinking funds based on your priorities for the remainder of 2020 and even looking out into 2021. You can also split the money up between existing sinking funds to reach your goals faster if you’re somebody who has been on the sinking funds train for some time now.
Non-Retirement Long-Term Investing
When it comes to setting money aside and investing it so that it can grow more than it would in a savings account over time, the number one priority is generally retirement. But, let’s be real – there are so many other long-term goals that are just as important to us. For example, buying a home, sending our children to college, starting a business and so much more! If you have some extra cash that you had planned to use on travel and are wondering what to do with it now, a great option is to invest it in a well-diversified investment portfolio that includes a strong mix of appreciating assets like stocks and bonds. Most financial experts agree that index funds are a great way to start investing for long term goals because they come with significantly lower fees than mutual funds that have an active manager who charges fees for buying and selling investments and managing the balance of assets in your portfolio. Given the technology that exists today and the laundry list of 21st-century apps and tools to help anyone get started investing in diversified funds with even just $1, this is certainly an option that more people can explore!
Now that you’ve seen the full list, what do you think you want to prioritize based on your financial situation and future goals? The important thing to keep in mind when making a decision about your money is that there are no right answers that are one-size-fits-all. Instead, it’s key to remind ourselves that personal finance is just that – personal! Only you know what the right next move is, but it’s always best to make money moves based on information and research, rather than a hunch or an impulse.