Having a ton of options isn’t always a good thing. Some who wish to save feel overwhelmed by choosing where to put their money. High-yield savings accounts (HYSAs), certificates of deposit (CDs), trading apps, robo-advisors and retirement plans are financial tools in our tool belt – and choosing the right one depends on a careful assessment of your goals, risk tolerance, time horizon and other preferences.
Throw in Treasury bills and money market funds and it makes sense why you might feel overwhelmed, and end up with “savior paralysis.”
What is ‘savior paralysis’ – and why it happens
You may be focusing on the idea of making the best choice to avoid making a decision altogether. This “savior disability” situation, like disability analysis, leads to stagnant income. It is better to save money incompletely than not to save money at all.
Not making a choice can feel safer than making the “wrong” choice, and this causes people to miss out on long-term returns.
How doing nothing can hurt your money
It is not only the number of good benefits that you lose due to unemployment. Each year, money sitting idle in your low-yield checking or savings account loses purchasing power due to inflation. If you don’t put your money into accounts that grow over time, you won’t have much financial flexibility in retirement.
That doesn’t mean you have to invest every penny you have. If you do, you may have to sell assets to cover emergency expenses, and that may result in selling funds where they fall, and you could be locked in a loss as a result. However, keeping too much money aside can harm your long-term financial plan.
Financial advisors often recommend having an emergency fund that can cover three to six months of living expenses in case the unexpected happens. You may also want to keep your savings for short-term goals in a more liquid account, not in the stock market.
How to break the saver handicap with a simple cash flow
Simple financial structures make it easier to deal with complex decisions and know how to allocate each dollar. Another way is to divide your money into three categories according to how soon you will need it.
Any cash you need in the coming month can go into a checking account. HYSA which allows you to make unlimited withdrawals without incurring any fees is also a viable option.
Funds that you won’t need in the next one to three years can go into a HYSA, a CD with a one-year term, a money market account or Treasury bills. Savings accounts and money market accounts are more accessible, while CDs and Treasury bills lock in an annual percentage yield (APY) until maturity.
Any cash that you won’t need for many years can be invested. It is important to save for retirement using a 401(k) or similar retirement savings account and/or an individual retirement account (IRA). You can also invest in a taxable brokerage account, especially for long-term goals that aren’t as far off as retirement, like buying a home.
