Darcy V. from Rapid City, SD asks: Hi Mitch, Over the past year and a half my husband and I have saved quite a bit of cash and are also generally spending less. We’ve surpassed our emergency savings comfort level, but now feel a bit trapped. The market is too high to invest but cash means we’re losing to inflation. What do you suggest we do?
Mitch’s Response:
Thanks for emailing your question. Your story is similar to that of many American families at the moment. For many, the pandemic meant receiving stimulus checks while also diverting spending away from services, which has resulted in a cash surplus. According to the Federal Reserve Bank of New York, households have accumulated $1.6 trillion in excess savings, following four consecutive quarters of record savings rates.1
Researchers at the New York Fed say that the massive cash hoard is not necessarily due to an intent to be more astute savers – it is being propelled along by ‘generally spending less,’ as you reference in your question.
I’d call this a very good problem.
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Assuming you have six to twelve months’ worth of income replacement set aside in emergency funds, I think it’s a good idea to get some of your extra cash to work. While I understand your reluctance to invest in the stock market, I would also remind you and readers that it is rarely a great idea to try and time the market. As the old saying goes, it’s “time in the market, not timing the market.” If you do not need this money for 10+ years, and your long-term goal is to grow the assets, then I think investing in a diversified portfolio of equities could be a fine option.
But let’s say for argument’s sake you are still hesitant based on the market trading close to all-time highs, coupled with a general sense that the economy is not doing that well. What I would advise, then, is to formulate a plan to invest the money over time – perhaps a percentage now, a percentage in three months, six months, etc. This strategy is effectively dollar-cost averaging, and I think it gives you a reasonably good way to address your feeling that the market is too high.
One other idea I would offer you, in the spirit of the holiday season, is to consider a charitable gift to an organization of your choosing. There is an opportunity in 2021 to take a tax deduction that is not otherwise available. According to the IRS, “Usually taxpayers who take the standard deduction cannot deduct their charitable contributions. The law now permits taxpayers to claim a limited deduction on their 2021 federal income tax returns for cash contributions they made to certain qualifying charitable organizations. These taxpayers, including married individuals filing separate returns, can claim a deduction of up to $300 for cash contributions to qualifying charities during 2021. The maximum deduction is $600 for married individuals filing joint returns.” This could be another great way to put some of your extra cash to good work.
Another suggestion that may help the feeling of being ‘trapped’ is knowing and evaluating your net worth. While we may not know exactly what is next for the market, knowing your net worth can be critical to your financial well-being and can help you prepare for what’s ahead.
Calculating your net worth may give you a better idea of where you stand in terms of your long-term investment goals. If you have $500,000 or more to invest and want to understand how to measure your net worth, download our guide Measuring Your Net Worth.3 Simply click on the link below to get your copy today!
Disclosure