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What to do with the extra cash in your bank account

(Rachel Orr/The Washington Post; iStock)
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Some millennials may be holding on to a lot of cash, studies show.

For instance, a survey released this week by UBS Wealth Management Americas found that millennials who made at least $100,000 or who had that much in assets held roughly half of their portfolios in cash. And when asked how they want to invest money they won’t need for more than 10 years, 32 percent of 18- to 29-year-olds said they want to hold the money in cash, according to a separate poll from published in July. That was higher than any other age group. 

Of course, there are good reasons for having a cash fund on hand, such as to cover emergencies or to pay for major purchases. But there can be a cost to leaving too much money in plain old cash. Consumers could still end up losing if the service or property they’re saving for, such as a house, becomes more expensive, says Susan Crown, a financial adviser with UBS Financial Services.

Investing that cash in real estate, stocks and other markets could help the cash grow and help you accomplish certain financial goals more quickly. Wherever you stand, here are some ways to make sure you’re putting your cash to good use.

Set specific goals. Once you set aside the money you need to pay the bills and create a fund to cover emergencies, it can help to think about what you want to accomplish with the rest of the money in your account. “Have a real purpose in mind, not just a lump sum of money,” says Aron Levine, head of Merrill Edge, the online brokerage arm of Merrill Lynch. Having a goal in mind, even if it’s next year’s summer vacation, can encourage some people to keep saving more, Levine said.

Invest it appropriately. Knowing what you want to do with the money also makes it easier to figure out how the cash should be treated. Money for goals that are far off, such as a college costs for a toddler, can be at least partially invested in riskier assets like stocks, because savers would have time to recover any losses, she says. But money that is needed more immediately, say, for a car you want to buy next year should stay in cash or be invested in low-risk investments such as bonds. Savings intended for a down payment on a home can be partially invested in stocks depending on when you plan to make the purchase.

Up your retirement contributions. Realizing that you have extra money left over each month may be a sign that you can afford to save more in your retirement account. Workers should at least contribute enough into their 401(k) plans to receive any matching contributions offered by their employers, Crown says. But some advisers recommend saving even more, up to 15 percent of pay, if you can afford it.  Workers who haven’t reached their target contribution rates may be able to choose to have their savings rate automatically increased each year by one or two percentage points.

But before you throw every free dollar into your retirement account, you should make sure you have enough money on hand to pay for other expenses that might come up sooner, says Deiken Maloney, a director with Northern Trust Wealth Management. “You need to hold on to a safety net,” he says. Otherwise, workers may be tempted to dip into their retirement accounts early to cover major expenses — something 25 percent of millennials surveyed by UBS said they had already done.

Open an IRA. People who are already maxing out their 401(k) plans can think about opening an individual retirement account (IRA), where they can contribute up to $5,500 a year, or $6,500 a year if they are at least 50 years old. IRA deductions are limited for couples and individuals with access to a workplace retirement account. Roth IRAs, which take after-tax dollars, offer more flexibility for people who aren’t sure what to use the money for. Contributions can be withdrawn at any time. And investment earnings can be withdrawn without paying a 10 percent tax for early withdrawals after an account has been open for at least five years and if the money is used for a first-time home purchase, qualified education expenses or to pay for certain medical expenses.

Consider a brokerage account. Investing can be intimidating, especially for young savers who don’t have quite enough cash where they feel ready to hire a financial adviser, Maloney says. But after the emergency fund is set and retirement contributions are substantial, additional savings can be invested through a brokerage account or online based investment firm. Choosing the right account will depend on how much you have to invest and how much advice you need.

For example, so-called roboadvisers such as Wealthfront, Betterment and Personal Capital will create portfolios based on a person’s goals and risk tolerance using stocks and low-cost exchange-traded funds. Smartphone apps can be helpful for savers who want to start investing but don’t have a huge portfolio. Through one app, Stash, people can start investing in ETFs with as little as $5. And with Acorns, savers can invest the spare change left over after everyday purchases. People who want to trade individual stocks and who want to be more hands on with their portfolios can also turn to traditional brokerage firms, such as Charles Schwab and E-Trade, which offer some online portfolio guidance for investors who want the help.

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