When Am I Done Saving?

Wonder what you should do once your emergency savings account is filled to the brim? These moves can help you amplify your funds.

I used to make fun of my mother for carefully refolding and saving aluminum foil. I sometimes forgot that Mom was raised in the Allegheny Mountains, the daughter of a coal miner who scraped to provide for his family. Now that I've experienced a recession or three and watched people I care about struggle through a global pandemic, I understand my mother's thrifty ways much better.

When you've experienced any kind of financial trauma, it's natural to want to save money. Living frugally and bolstering your emergency savings can give you the reassurance that you're less likely to live through that trauma again.

It's true that putting money into your savings account will give you an excellent and much-needed safety net. But you also need to know when you've saved enough and could put your money to other uses.

How do I know I have enough?

The standard rule of thumb is that you need to put away enough to cover bills for three to six months. But only you know what it will take to make you feel comfortable.

Put that money into your emergency fund. This is the money you will fall back on if you lose your job, your car needs brakes, or the water heater goes on the fritz. Your emergency fund is the cushion between you and financial ruin.

If your "sweet spot" is four months' worth of bills, take a look at your monthly expenses and work out how much you'll need to save. Once you hit that marker, you should continue to put money aside every month, but it's time to make your money work for you.

What do I do next?

Fund your retirement

Begin (or continue) to plan for retirement. If you are so young that retirement feels light-years away, great! That gives compound interest time to work its magic. If you are uncomfortably close to the time you would like to retire, throw everything you have at retirement vehicles.

Take advantage of your company's 401(k) or other retirement programs and aim to max out your annual contribution. If a 401(k) is not an option, contribute to an IRA (traditional or Roth) or put money into a taxable brokerage account. In other words, find a retirement account that works for you and commit to growing it.

Make short- and medium-term plans

Another important reason to save money is to put it towards specific goals -- such as making a down payment on a home, buying a car, or taking a family vacation to Greece.

You may not need that money immediately, but it's also not a great idea to tie it up in a retirement fund or invest it on the stock market. Consider putting this cash into a certificate of deposit (CD). CDs often pay a slightly higher interest rate than savings accounts because you commit to leave the cash alone for a fixed period of time.

There are a couple of great things about CDs:

• They are FDIC-insured, meaning your cash is protected.
• The longer your investment, the more interest you will earn. Common CD terms range from six months to five years.

Other investments may earn more money, but CDs are a good place to park cash that you know you will need at a specific point. The only thing to watch out for is that you'll have to pay a penalty if you want to withdraw your money early.

Look out for the kids

Once your emergency fund is in place and you are on track with retirement planning, begin tucking funds away into a 529 plan. A 529 plan is designed to help you save for your children's future education costs while offering tax advantages.

Let's say you put $100 into a savings account for your child every month from the day he or she is born. If you're lucky, that account will be worth $22,000 to $23,000 when your child leaves for college. By putting that same $100 into a 529 plan instead, your child will leave for school with closer to $37,000 to $40,000 in education funds, due to the average returns 529 plans enjoy.

529 plans also offer a tax benefit no savings account can match. You'll deposit money in a 529 plan on an after-tax basis, but due to the plan's rules, it grows tax-free. This means that if you contribute $30,000, but the account grows to $45,000, there are no taxes to pay on the additional $15,000.

The trick is to make savings work for you -- keep some in low-interest, federally insured products and risk some through investments designed to beat inflation. Learning to balance risk and reward is the best way to build financial security.

Want to save more? See if a high-yield savings account is worth it in The Ascent's quick guide.