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If Santa Claus deposited cash into your Christmas stocking, you have several options for what to do with it — besides spending it as soon as the stores reopen after your holiday dinner.
Paying off debt and adding to your savings are two of the smartest options. But no matter what the amount is, this cash can help you start off 2020 on a financially savvy note.
1. Make paying off debt a top priority
Savings accounts aren’t quite paying annual percentage yields (APYs) like they were earlier in 2019.
The top high-yield savings accounts listed on Bankrate yield at least 1.7 percent APY or higher. Meanwhile, the average interest rate on variable-rate credit cards is about 17.37 percent, according to Bankrate data.
Pay off credit card debt first, and make paying off other debt a priority as well. Follow Bankrate’s tips for paying off credit card debt.
2. Put your cash in a savings account
Top yields on savings accounts are still beating inflation, but many Americans aren’t taking advantage.
A Bankrate survey published in May found that nearly a quarter of Americans (24 percent) weren’t earning any interest in their short-term savings.
As of Dec. 18, the annual rise in the core PCE price index, which the Fed uses to measure inflation, was 1.6 percent in October according to Bureau of Economic Analysis data released in November.
That means if your cash doesn’t have a higher APY than inflation, your money is losing purchasing power. Over time, that causes your money to lose value.
The average savings account yield is just 0.10 percent APY, but multiple banks offer savings accounts paying north of 1.7 percent APY. Now’s the time to take advantage of these yields.
However, if you want check-writing ability and a high APY, a money market account may be a better solution.
3. Start an emergency fund
It’s recommended that you have enough savings to cover at least six months’ worth of expenses in an emergency fund. However, nearly three in 10 (28 percent) U.S. adults have no emergency savings, according to a June 2019 Bankrate survey.
It’s imperative that you have an emergency savings account to cover unexpected expenses, such as a car repair or leaky roof. These funds need to be liquid – meaning you can access them at any time – and earning the highest APY possible.
4. Open a CD
For longer-term savings, a CD may be a better option to earn more interest. The typical time horizon for CDs is between one year and five years.
The best strategy is to choose a CD for the shortest amount of time that gets you the highest APY. Currently, one-year CDs and two-year CDs fit this bill.
Compare CDs on Bankrate to find the right one for your situation.
5. Open an IRA
If you’ve paid off debt and have a savings account or money market account as your emergency fund, you may want to contribute cash to an IRA. A traditional IRA may be able to help you reduce your taxable income when you file your 2019 taxes. Also, depending on your income and which tax bracket you’re in now – compared with in the future – a Roth IRA may make sense.
IRA contributions for the 2019 tax year can be made until April 15, 2020. Though, depending on your income, you may not be able to contribute to a Roth IRA – or you may be able to only contribute a reduced amount. See if you’re able to contribute to a Roth IRA based on your income.
If you’re not eligible for a Roth IRA and have maximized other options, such as maximizing your contributions to an employer-sponsored plan, such as a 401(k), determine the time horizon for using this money and what you want this money to do for you.
“It could be help with a down payment. It could be just, ‘I want it to grow over the next 10, 20 years – because I know the longer I leave it in, the more it’ll grow,’” says Tim Kenney, certified financial planner at TK Pacific Wealth. “Or it’s just, ‘Hey, I think I might need something in the next three to six months,’ whether it’s buying a car or whatever. That’ll help you establish just a timeline.”
Depending on the timeline, a barbell approach may be the type of strategy to pursue, Kenney says.
“If it’s a long-term type of (an) investment, if you’re willing to hold that through, five, 10 years or longer, then I’d feel pretty comfortable with bringing that into the market or some type of a balanced portfolio,” Kenney says. “If it’s anything other than that — five years or less — I would say it’s probably not worth taking the risk, and I would more suggest things like CDs or money markets or perhaps even short-term bond funds.”
6. A brokerage account may be the place for longer-term money
Depending on your goals, a brokerage account may be the right place for some Christmas cash.
Depositing cash into a new brokerage account may help you earn a bonus depending on the deposited amount.
If the cash is not going to be invested, make sure you know what your cash will be earning if it’s going to be sitting on the sidelines in a brokerage account.