I talk to a lot of people who have done a good job saving, but know that their money can be doing more for them.

So if you have some extra cash sitting in a savings account, with no immediate plans to spend it, here are your options and what you should be considering:

Save for a well-defined goal

If you have a goal that is well-defined, meaning you know your time horizon and how flexible that time horizon is, you can focus on optimizing for taxes and investment returns. 

Be sure to match the investment risk you take with your time horizon – the longer the time period before needing the money, the more risk you can take. If your time horizon is flexible, you can likely take more risk as well.

When your goal is well-defined, you can also take full advantage of the tax benefits that come with accounts like 401(k)’s, IRA’s, or HSA’s for retirement savings or 529 plans for college savings. When you know exactly what you’re saving for, you don’t need to worry as much about the restrictions that these accounts impose in exchange for the tax benefits.

Save for a loosely defined goal

When your goals are more loosely defined – maybe you don’t know whether the savings will be used for college or retirement – you need to focus more on flexibility and less on optimization.

Rather than strive for tax savings, you want to be sure that your money will be available when you need it and for the purpose that you need it without having to pay costly penalties. A brokerage account can be a great place to stash savings where you can still invest the money and withdraw it without the age limitations of retirement accounts or the specific spending requirements of 529 plans.

It’s also important to continuously revisit your goals and savings plan, and adjust how your investments are allocated as your goals become more clear.

Pay down debt

The third option is to pay down existing debt. There can be plenty of psychological benefit to paying down debt, so this decision shouldn’t be made in a silo.

However, if you want to know if paying down debt makes sense from a financial standpoint, compare the interest rate on the debt to what you would expect to earn in the market if you invested the funds for one of your longer term goals.

Closing thoughts

Ultimately, be sure that you’re being intentional with your savings and that your money is working for you to achieve your unique goals.

There is no right answer that applies to everyone when it comes to where and how to save and invest.

Joe Calvetti is a CPA and the founder of Still River Financial Planning, a comprehensive, fee-only financial planning firm that specializes in working with young families and professionals. Click here to learn more about how we work with clients.

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Disclaimer: The information provided above is for educational purposes only and should not be considered financial, legal, or tax advice. You should consult with a professional for advice specific to your situation.