Are you one of the recipients of the most recent round of stimulus money? Or maybe you just came into a small inheritance or windfall of cash. What should you do with this money? If you have credit card debt, pay back your debt, and then stop using your credit cards! If you continue to buy things and rack up interest, you’ll be paying that debt long after the stimulus checks stop. If you owe money, rent for instance, then now is the time to pay it back. Basically if you owe money, now is the time to give it back.

HOWEVER. Rather than using 100% of this extra cash to pay off debt, save 50% towards your emergency fund. Why?? Because if you have debt, chances are, you did not have enough in your emergency fund to begin with. What would happen if another big expense arises? That’s right, it’s back to debt. If 50% covers all your debts, then great! You should still cut up that credit card. If not, at least you can make a dent in the amount owed and use the rest to protect yourself from future unforeseen expenses.

This brings us to the topic of the month: Savings. Let’s say you don’t have debt, besides a mortgage, which bears so little interest that it wouldn’t make sense to pay extra right now. If your emergency reserves are low, then saving money would make sense. Before the pandemic, we all thought 3 to 6 months of cash was sufficient to cover expenses. Now that people have been unemployed for a year, depending on how stable you feel about your situation, it might make sense to save 9 months or even 1 year in an emergency fund. If you’re in the lucky bunch who is still employed and has sufficient emergency reserves set aside, then you can consider spending half and saving or investing the other half towards a long-term goal.

Most of us don’t like the idea of hanging onto so much cash in an emergency fund. One, it’s tempting to spend. Two, it’s not earning interest. If you recall from past article Piggy Bank vs. Savings Account, always keep 1 to 2 months of expenses in a checking account, and then the rest in a savings account. This will limit ATM or debit card access to the funds by a few days, and allow you to earn some interest on that money.

If you have 6 months or more in emergency cash, then it’s time to look at a higher-interest approach. Keep 2 months’ cash in checking, 2 months’ cash in savings, and the rest in a certificate of deposit, or CD. These are not music playing mirrored discs. No, these are bank products that offer more interest on your cash than savings accounts. CDs are held by the bank for a term, ranging from 1 month to multiple years, and the amount of interest you earn depends on how long and how much is being held. The longer the term or the greater the amount, the more interest you earn. You cannot touch the money during the term of the CD, so choose the term wisely. When it comes to an emergency fund, it’s best to pick 1 to 3 months for a CD term, in case you need the money after depleting 4 months of cash in checking and savings. Being bank products, they are typically FDIC-insured, meaning you can’t lose money, but it’s always good to double-check with your financial institution.

For those with 1 year of emergency funds or more, you can use multiple CDs, so that some of the money is available sooner and some is available later. If you want to employ this strategy, you would definitely want to discuss with a financial advisor.

With the financial world being unpredictable, especially in a pandemic, having some savings helps with peace of mind no matter what may happen. And peace of mind is a much better gift than any you can buy.