Investing Cash: Strategies For Smart Money Allocation

If you have cash on hand and are looking to invest, it's important to understand the different options available to you. Cash investments are typically short-term and highly liquid, with minimal market risk and a maturity period of less than 3 months. These include money market accounts, high-yield savings accounts, and certificates of deposit (CDs). While cash investments are generally considered low-risk, they may not keep up with inflation and can have lower returns compared to stocks or bonds. It's crucial to balance your cash holdings with other investments to meet your long-term financial goals.

When deciding how to allocate your cash for investing, consider your financial situation, budget, risk tolerance, time horizon, and investment knowledge. Diversification is key to building a robust investment portfolio. Speak to a financial advisor to determine the best investment strategy for your needs and goals.

Cash investments: Money market accounts and certificates of deposit are examples of cash investments

Money market accounts and certificates of deposit (CDs) are both types of cash investments. They are considered safe investments because they are FDIC-insured, but they have some key differences.

Money market accounts are a type of mutual fund that invests in short-term, interest-bearing instruments. They have variable interest rates, meaning that the rates rise and fall with the overall interest rate market. Money market accounts usually offer access to funds and rates comparable to regular savings accounts. They also often require a higher minimum deposit and may require a minimum balance to receive the highest rate. Money market accounts are a good option if you want the option to add and withdraw money regularly and want checking account-like perks such as debit cards, ATM access, and check-writing abilities.

Certificates of deposit, on the other hand, are timed deposits that provide a fixed interest rate tied to a maturity date. CDs tend to have higher interest rates than money market accounts, but there is no access to your money until the term ends, and withdrawing early usually results in a penalty. CDs are best for those who want to lock in a higher interest rate and won't need the money on short notice.

Both money market accounts and CDs can be good options for cash investments, depending on your specific needs and financial goals. It's important to consider the differences between these two types of accounts and choose the one that best aligns with your investment strategy.

Emergency funds: It is recommended to have an emergency fund of 3-8 months' worth of expenses

It is recommended to have an emergency fund of three to eight months' worth of expenses. This will help you prepare for income shocks, which tend to be more expensive and last longer than spending shocks.

An emergency fund is a sum of money set aside to cover the financial surprises life throws your way. These unexpected events can be stressful and costly. For example, a medical or dental emergency, unexpected home repairs, or unplanned travel expenses.

The recommended amount to save for an emergency fund varies depending on who you ask. Some financial experts suggest setting aside three to six months' worth of living expenses. However, during the global pandemic, when many people faced unemployment and financial difficulties, this advice was criticised as impractical.

Economist Emily Gallagher suggested a minimum savings target of $2,467 for American households making less than 200% of the poverty line. This is based on historical data from 2010-2012 and is a more realistic goal for low-income savers.

Another suggestion is to save enough to cover half a month's worth of living expenses or $2,000, whichever is greater. This will help you prepare for potential spending shocks.

You can keep your emergency fund in a traditional savings account or explore cash investments, which offer higher interest rates and low risk.

Savings accounts: These are a safe investment alternative for cash

Savings accounts are a safe investment alternative for cash. They are a good option if you need to access your money in the near future and are risk-averse. Many banks that offer these accounts are insured by the Federal Deposit Insurance Corporation (FDIC), so you don't have to worry about losing your deposits within federal insurance limits.

While savings accounts are considered safe investments, you do run the risk of losing purchasing power over time due to inflation if the interest rates are too low. Therefore, it is important to consider high-yield savings accounts, which can be found at online banks. These accounts can provide much higher interest rates than traditional banks, as they have lower operating expenses.

Additionally, savings accounts offer the convenience of having easy access to your money. You can quickly transfer funds to your primary bank or access them via an ATM. They are also suitable for those who want to avoid the risk of losing money in a market downturn.

However, it is essential to note that holding too much cash in savings accounts can make it challenging to meet long-term financial goals. Therefore, it is recommended to balance your cash and investments to ensure you are making informed, strategic choices.

High-yield savings accounts: These are a good option for those who need access to cash in the near future

High-yield savings accounts are a great option for those who need access to cash in the near future. They are a safe place to earn interest on your money while keeping it easily accessible for emergencies or other expenses. Annual percentage yields (APYs) on top high-yield savings accounts are 5% and above, which is around nine times the current national average rate of 0.45% to 0.57%.

High-yield savings accounts are ideal for those who want to earn a competitive yield on their savings account to boost their savings potential. They are also a good option for those who don't have an emergency fund or have their emergency fund commingled with their checking account.

• No Monthly Service Fees: Look for an account that won't charge service fees that can eat into your savings.
• Access to Your Money: Ensure you can withdraw your money easily, especially in an emergency. Look for features like ATM access or money transfer services.
• Competitive APY: Choose an account with a competitive APY to boost your savings. The national average APY is currently low, between 0.45% and 0.57%, so look for accounts offering higher rates.
• FDIC Insurance: Ensure your high-yield savings account is offered by an FDIC-insured bank or a National Credit Union Administration (NCUA)-insured credit union and stays within federal insurance limits and guidelines. This will protect your deposits up to $250,000.
• No Minimum Opening Deposit or Minimum Balance: Look for accounts that don't require a minimum opening deposit or ongoing minimum balance, giving you more flexibility with your savings.
• Digital Tools: Many high-yield savings accounts offer digital tools that allow you to manage your savings easily through your computer or mobile device.
• LendingClub Bank: 5.00% APY, no minimum opening deposit, and no monthly service fees.
• BrioDirect: 5.00% APY, $5,000 minimum opening deposit, $25 minimum balance to earn APY.
• EverBank: 4.75% APY, no minimum opening deposit or balance requirement.
• Bread Savings: 4.75% APY, $100 minimum opening deposit, no monthly maintenance fees.
• CIT Bank: 4.70% APY, $100 minimum opening deposit, no monthly maintenance fees, $5,000 minimum balance to earn competitive APY.
• Bask Bank: 4.65% APY, no minimum opening deposit or balance requirement.
• Popular Direct: 4.65% APY, $100 minimum opening deposit, no monthly maintenance fee, $100 minimum balance to earn APY.
• CIBC Bank USA: 4.61% APY, $1,000 minimum opening deposit, no monthly service fee.
• TAB Bank: 4.52% APY, no minimum opening deposit or monthly maintenance fee.
• UFB Direct: 4.31% APY, no minimum opening deposit, no monthly maintenance fee, ATM access.

Investment portfolios: Cash and cash equivalents should comprise between 2% and 10% of your portfolio

Cash and cash equivalents, such as certificates of deposit (CDs) and money market funds, are among the safest and most liquid investments. They are available when you need them and there is little risk to the principal. However, cash has historically not been able to achieve one of the most important long-term investing goals: returning more than inflation.

Cash should occupy a small place in most investment portfolios, relative to stocks and bonds. Cash serves two important strategic purposes: emergency funds and money to be invested.

A general rule of thumb is that cash and cash equivalents should comprise between 2% and 10% of your portfolio. This will vary depending on your unique circumstances and current market conditions. For example, if you are planning a big purchase or expense within the next few years, it makes sense to set aside extra cash.

The proper role for cash in a portfolio depends on your risk tolerance, your current stage in life, and other factors. For example, retirees may want to hold more cash to provide peace of mind that they have sufficient liquid reserves to weather periods of uncertainty or an economic downturn. Those with years to go before retirement and who are focused on wealth accumulation may want to hold less cash and take more investment risk.

Holding a modest percentage of your portfolio in cash and cash equivalents allows you to quickly take advantage of investment opportunities, particularly during times of market disruptions or fluctuation.

Frequently asked questions