Should You Put Your Extra Cash in the Bank or a Retirement Account?

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You’ve budgeted wisely and have extra cash flowing in. Where should you put it? Find out here. 

If you’ve budgeted wisely and are spending less than you make, that’s an excellent step toward financial health. It means you’ll have extra money to save every month, and this can help set you up for a secure financial future, as well as provide peace of mind in case anything unexpected happens.

However, one important question you need to answer is, “Where should I put my extra cash?” Is it best to contribute to emergency savings, or should retirement be the bigger priority? Or should some of your money go into a standard brokerage account or a rainy-day savings account? What about college savings for your kids, if applicable?

Unfortunately, there isn’t a perfect answer for everyone, and it depends on your current financial situation, your goals, and other factors.

Where should you put your money?

Generally speaking, there are six main options when it comes to allocating your extra cash. And in general order of highest priority to lowest, here’s how I typically rank them:

Emergency savingsRetirement fundCollege savingsChecking accountStandard brokerage accountRainy-day savings

Of course, this order doesn’t apply to everyone. As an example, if you already have six months’ worth of expenses saved in an emergency fund but have fallen behind in retirement savings, you can swap the order of those two. And clearly, if you don’t have children, college savings isn’t a factor.

With that in mind, here are some general thoughts that should help you prioritize these for yourself.

Emergency savings

A six-month emergency fund like most financial planners recommend can be an excellent financial tool, even though it can seem like an intimidating amount of money to set aside. But you don’t need to get there right away.

If you don’t have at least $1,000 set aside to cover unexpected expenses, that should probably be your first priority. If you have a $1,000 emergency fund, you’ll be prepared for most unexpected expenses. It’s still a good idea to keep contributing after you’ve reached $1,000, but you can also save for other goals at the same time after you reach that threshold.

Retirement savings

Most financial planners suggest saving about 10% of your income for retirement, not including any matching contributions your employer makes on your behalf. If you already contribute to a 401(k) or similar plan through payroll deductions, you might not need to manually put as much into retirement as someone who is self-employed or doesn’t have an employer’s plan. But after forming a base for your emergency fund, this should be the next highest priority.

Having said that, it’s worth noting that just because something is a priority doesn’t mean you should put all of your extra money into it. Unless you’re really behind when it comes to retirement savings, there’s nothing wrong with allocating your savings for emergencies, retirement, college, etc.

College savings

If you have kids and you want to help pay for their college, a 529 savings plan could be an excellent tool. But most financial planners (including myself) say it should come after retirement savings on the priority ladder. The reason — making sure your own retirement is secure will prevent you from becoming a financial burden on your children later in life, which can be far worse than them having to contribute to their own education.

Other financial choices

You can also choose to let some of your extra money accumulate in your checking account, and if you don’t have much of a cushion in there to cover your day-to-day expenses, that could be a smart idea. There’s also the option of saving for the long term in a standard (taxable) brokerage account, and if you are already on track with retirement savings, this can be a smart idea. And for shorter-term goals, setting money aside in a non-emergency high-yield savings account can be a great way to do it while generating some interest income.

The bottom line

There’s no one-size-fits-all answer when it comes to the best places for your extra cash. It depends on what areas you are already financially healthy, and what areas could use the most work. One important takeaway is that there aren’t really any bad ways to save money within these six main options, but smart allocation of your extra cash can go a long way toward setting you up for long-term financial success.

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