Although the Covid-19 pandemic has turned many Americans' finances upside down, it's provided others with the opportunity to beef up their emergency savings. So much so that nearly 1 in 4 Americans have over 10 months of living expenses saved up, according to a recent survey from SoFi.
Another quarter of respondents say they have the equivalent of four to six months of living expenses saved so far, according to SoFi's survey of 1,000 consumers. That's the amount experts typically recommend having on hand to avoid taking on debt when emergencies come up, such as a job loss, car repairs or medical expenses.
But what should you do after your emergency savings has reached a comfortable rate? You can, of course, keep adding money to your savings account, but many experts say that may be shortsighted.
"The pandemic has certainly demonstrated the importance of saving for emergencies. However, it can be harmful to hold too much cash in your savings account," says Haley Tolitsky, a certified financial planner with North Carolina-based Cooke Capital.
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That's because funds sitting in savings are earning almost no interest, so you end up losing money over time as the cost of goods rise, Tolitsky says.
To determine the best steps to take after you've accrued a comfortable level of savings, CNBC Make It spoke to several financial experts. Here are four ways they recommend Americans put any extra savings to work.
1. Pay down debt
If you have any outstanding debts, particularly high-interest credit card balances or personal loans, paying those down needs to be a priority, says Sarah Carlson, a CFP and founder of Washington-based Fulcrum Financial Group.
Many banks pay minimal interest on savings accounts, around 0.07% on average, while the average interest rate on a credit card is 15.91%. And if you fall behind on your card payments, you could get hit with penalty APRs of 30%.
"Workers need to prepare not to get stuck in that crunch," Carlson says. "Before they save for a new car, iPhone, house, they need to get this credit card debt reduced and eliminated."
2. Save for other expenses
Once you've saved up a comfortable level of emergency expenses, evaluate what your other financial needs and goals may be. Think about whether you have any big purchases coming up, such as saving for a down payment on a home or buying a car, says Joey Stemmle, a CFP with Virginia-based Riverstone Wealth Advisory Group.
Stemmle also recommends everyone have a "treat yourself" account that they put money into on a regular basis so they can enjoy some guilt-free spending.
"The money you spend in this account I view more as a reward to do the things that you like. If you want to go get a massage, you want to have a fancy dinner or buy a new watch, you can do so knowing you have been disciplined on setting aside money for the expense," Stemmle says.
It may also be helpful to create separate savings buckets for expenses such as future travel, entertainment and commuting costs as things begin to reopen. "You may want to create a separate savings account to hold these funds because remember — your emergency fund is for emergencies only," Tolitsky says.
3. Boost retirement contributions
Check in on your retirement savings, including individual retirement accounts and employer-sponsored plans like a 401(k). If you don't already contribute to a workplace retirement plan, now is the time to set that up.
Make sure you contribute enough to take full advantage of any match your employer may offer on your retirement contributions, Stemmle says. That is basically free money that can add up in the long run.
If you don't already have an individual retirement account set up, a Roth IRA can be a great way to save for retirement in addition to any employer-based plan you may have, Stemmle says. With a Roth IRA, you pay taxes on your money now and receive tax-free retirement income down the road if certain requirements are met. An individual can contribute up to $6,000 in a Roth IRA account in 2021 with a catch-up contribution available for those who are 50 and older.
Setting up a Roth IRA is pretty easy — you can open an account at any reputable custodian in just a few minutes, Tolitsky says. She recommends setting up automatic monthly contributions and investing your funds in a low-cost index fund or ETF that covers the total stock market.
If you already have retirement accounts set up, consider boosting your contribution levels or even maxing out your total savings for the year. For 401(k) plans, the maximum contribution limit for 2021 is $19,500. Those 50 and older can put away an extra $6,500 as a catch-up contribution.
4. Invest your money
If you've met your short-term savings goals and already set up retirement contributions you're comfortable with (or maxed them out entirely), it's worth considering opening a taxable investment account, says David Shotwell, CFP with Michigan-based Shotwell, Rutter and Baer Financial Planners.
One of the easiest ways to start investing is to use an online investing service that will help you set up an account and, based on your risk tolerance, invest you in a portfolio that usually includes low-cost index funds or ETFs, says Bryan Stiger, a CFP and financial planner with Betterment. "Online services will often automatically rebalance and tax-loss harvest for you, which is a great added benefit," Stiger adds.
You can do this yourself as well by opening a taxable investing account at a brokerage and picking out the investments by hand. Carlson recommends making monthly contributions to a global value mutual fund or ETF.
"As some normalcy returns, people need to remember what their absolute spending limits are and have well-defined financial goals they can plan around," Stiger says. After that, if you want to celebrate by going out to an extra dinner or two, there's no harm.