Smart Ways To Invest Your Cash Wisely

Investing cash in hand can be a tricky business. It's important to understand the risks and benefits of cash and cash equivalents, such as certificates of deposit (CDs) or money market funds. While these are generally considered safe and liquid investments, they may not offer the same potential for returns as other options.

One of the biggest risks of relying solely on cash is the opportunity cost of missing out on other investment opportunities with higher returns. Cash has historically struggled to keep up with rising prices, while stocks and bonds have delivered average annual returns above the inflation rate.

Therefore, it's generally recommended to keep a small portion of your portfolio in cash, while also investing in other assets such as stocks, bonds, mutual funds, and real estate. A diversified portfolio can help minimize risk and maximize returns over the long term.

1. Emergency fund: It's advisable to keep at least three to six months' worth of living expenses in a savings account as an emergency fund. This will ensure you have a buffer in case of unexpected events such as job loss, accidents, or medical bills.

2. Short-term goals: If you're saving for short-term goals (less than five years away), it's generally not recommended to invest the money in risky assets. Instead, consider high-yield savings accounts or short-term CDs, which offer relatively low risk and stable returns.

3. Long-term goals: For long-term goals, such as retirement, you can consider investing in stocks, bonds, mutual funds, or real estate. These options offer higher potential returns but also come with higher risk. It's important to assess your risk tolerance and invest accordingly.

4. Diversification: Don't put all your eggs in one basket. Diversifying your investments across different asset classes and industries can help reduce risk and improve your portfolio's performance over time.

5. Seek professional advice: If you're unsure about how to invest your cash, consider consulting a financial advisor. They can provide personalized advice based on your financial goals, risk tolerance, and investment horizon.

Emergency funds: 3-6 months' worth of expenses

It is recommended that you have an emergency fund that covers three to six months' worth of expenses. This is considered "tried and true wisdom", but the exact amount you should save depends on your individual income and comfort level. If you are making 25% less than you were pre-pandemic, for example, you should aim to save 25% less.

An emergency fund is money you set aside for large, unexpected expenses, such as car repairs or medical costs. It is a safety net that prepares you for the unexpected and protects you from debt. It is recommended that you keep your emergency fund in a simple savings account, money market account, or high-yield savings account.

• Set a savings goal. Figure out how much you need to save by looking at your budget or bank account to see what you usually spend each month, then multiply that number by three or six months.
• Lower your expenses. One place to start is by meal planning.
• Increase your income. You could work overtime, grab a side hustle, or sell things you no longer need.
• Automate your savings. Set up an automatic transfer from your paycheck to your savings account.

It's important to note that any amount you can save for emergencies is a good start. Even a small amount, such as $500, can help cover a surprise car repair or medical bill. You can also start with a smaller emergency fund of $1,000 if you have consumer debt and then work towards a larger fund once you're debt-free.

Money to be invested: Keep separate from emergency funds

When investing cash in hand, it is important to keep your investment money separate from your emergency funds. This is because emergency funds are meant to be easily accessible and liquid in case of unexpected expenses such as medical bills or home appliance repairs.

• Maintain a separate savings account: Keep your emergency funds in a high-yield savings account that is separate from your daily bank account. This will help you resist the temptation to dip into your emergency funds for non-essential purchases. A high-yield savings account will also allow your money to grow with interest while remaining accessible.
• Consider money market accounts: Money market accounts are a mix between checking and savings accounts, usually offered by banks and credit unions. They are considered low-risk and provide Annual Percentage Yields (APYs) of around 3-4%. Some money market accounts offer check-writing privileges and debit cards for instant access to your funds.
• Invest in Certificates of Deposit (CDs): CDs can offer higher interest rates than regular savings accounts, but there is usually a penalty for withdrawing your money before the maturity date. To increase liquidity, you can create a CD ladder by purchasing smaller CDs with different maturity dates. Some banks also offer no-penalty CDs that allow you to withdraw funds without sacrificing earned interest, although the interest rate may be slightly lower.
• Diversify your investments: Instead of investing all your money in one place, consider diversifying by investing in a combination of vehicles such as stocks, bonds, mutual funds, and CDs. This will ensure that your investment portfolio is not entirely tied up in illiquid assets.
• Maintain adequate emergency funds: While it is important to invest, make sure you have sufficient emergency funds set aside. A good rule of thumb is to have three to six months' worth of living expenses readily available. This will provide a financial buffer in case of unexpected events, such as job loss or medical emergencies.

By keeping your investment money and emergency funds separate, you can ensure that your emergency funds remain accessible and liquid while also growing your wealth through strategic investments.

Diversify investments: Spread cash across stocks, bonds, mutual funds, ETFs, etc

Diversification is a crucial investment strategy to manage risk and build long-term wealth. By spreading your cash across various investments, you reduce the potential loss if one investment drops in value. A well-diversified portfolio can include a mix of stocks, bonds, and alternative investments, such as real estate, commodities, and precious metals.

Stocks

Stocks are a common investment choice and can be a great way to propel growth during bull markets. When diversifying your stock holdings, consider investing in shares of companies from various industries, countries, and risk profiles. Include large-, mid-, and small-cap companies and spread your investments across sectors like technology, healthcare, energy, and financials.

Bonds

Bonds are another essential component of a diversified portfolio. They typically provide stability and reduce volatility. Government bonds, corporate bonds, and municipal bonds are some options to consider. The right mix of bonds for you will depend on your risk tolerance and investment goals.

Mutual Funds and ETFs (Exchange-Traded Funds)

Mutual funds and ETFs are excellent vehicles for achieving diversification. These funds are professionally managed collections of stocks, bonds, or other assets, allowing you to instantly diversify your investments. They offer exposure to a wide range of U.S. and international stocks and bonds, and some focus on specific sectors or asset classes, like high-dividend stocks or sector-specific funds.

Real Estate

Real estate is another way to diversify your investments. You can invest in physical properties or explore Real Estate Investment Trusts (REITs), which are companies that own and operate income-generating real estate. REITs can be a more accessible way to invest in real estate, as they often have lower minimum investment requirements.

Commodities and Precious Metals

Including commodities and precious metals in your portfolio can provide further diversification. Commodities, such as agriculture, energy, and metals, can be a hedge against inflation. Precious metals, like gold and silver, can also offer a store of value and a hedge against economic uncertainty.

Remember, diversification is not a one-time event. It requires regular maintenance and rebalancing to ensure your portfolio remains aligned with your risk tolerance and investment goals.

Pay off debt: Clear high-interest credit card debt

If you have cash in hand, it's important to first ensure that you don't have any outstanding high-interest credit card debt. Paying off this type of debt should be a priority, and there are several strategies you can use to achieve this. Here are some detailed instructions on how to tackle your high-interest credit card debt:

Develop a Plan:

Start by creating a clear and realistic plan to pay off your credit card debt. This might involve targeting one card at a time, focusing on either the one with the highest interest rate or the smallest balance. Sticking to a plan will help you stay motivated and disciplined throughout the process.

Pay More Than the Minimum:

Credit card issuers typically set a minimum monthly payment, often a small percentage of your total balance. However, paying only the minimum will keep you in debt for longer, as it primarily covers the interest charges. To reduce your principal balance faster, commit to paying more than the minimum each month. Every extra dollar contributes to reducing your overall debt and the interest charged on it.

Lower Your Interest Rates:

Explore options to lower your interest rates. You can do this by transferring your balance to a 0% APR promotional credit card, typically offered for 12 to 21 months. While there may be a balance transfer fee, you'll save on interest charges. Alternatively, you can simply ask your current credit card issuer for a lower interest rate, especially if you have a good history of on-time payments.

Increase Your Income:

Consider ways to bring in more money, such as asking for a raise, finding a higher-paying job, selling unused items, or leveraging your skills as a freelancer. This extra income can make a significant impact when paying off your credit card debt.

Reduce Your Expenses:

Review your monthly expenses and identify areas where you can cut back. For example, negotiate a lower cellphone bill, reduce dining out by cooking at home, or cancel unnecessary subscriptions. Redirect the money saved into paying off your credit card debt.

Automate Your Payments:

Set up automatic payments with your credit card issuer to ensure you never miss a payment. Automating your payments can also help you stay on track with your debt repayment plan, especially if you set up recurring payments for a fixed amount that is higher than the minimum.

Use Cash or Debit:

Switching to cash or debit card usage can help you pause the growth of your credit card debt. Using cash or debit may also make you more mindful of your spending, as you'll be more aware of the immediate impact on your finances.

Remember, it's important to be disciplined and consistent when implementing these strategies. Combining multiple approaches will help you accelerate your progress in becoming debt-free.

Retirement plans: Invest in a 401(k) or IRA

Retirement plans are an important part of investing cash in hand. Here are some key considerations for investing in a 401(k) or IRA:

K) Plans

A 401(k) is a defined contribution plan offered by many employers. You can contribute a percentage of your salary, and your employer may match your contributions up to a certain limit. The total contribution by both you and your employer cannot exceed $69,000 in 2024 or $76,500 if you're 50 or older. This increases to $70,000 and $77,500, respectively, in 2025.

There are two types of 401(k) accounts: traditional and Roth. With a traditional 401(k), your contributions are made pre-tax, reducing your taxable income for that year. For example, if you earn $50,000 and contribute $10,000 to your 401(k), your taxable income for the year would be $40,000. On the other hand, Roth 401(k)s are funded with after-tax money and do not reduce your taxable income for the year. While there's no upfront tax break, withdrawals in retirement are tax- and penalty-free, provided you're at least 59½ years old and have had the account for at least five years.

IRAs

IRAs are retirement savings accounts that can be set up through a financial institution. There are two main types: traditional and Roth. The total contribution limit for IRAs is much lower than 401(k)s, at $7,000 in 2024 and 2025, or $8,000 if you're 50 or older. IRAs typically offer a wider range of investment options than 401(k)s.

With a traditional IRA, your contributions may be tax-deductible, reducing your taxable income for the year. However, if you also have a 401(k), your deduction may be reduced or eliminated based on your income. With a Roth IRA, there's no upfront tax break, but qualified distributions in retirement are tax-free. Additionally, there are no income limits for contributing to a Roth IRA, unlike traditional IRAs, which have income restrictions.

Choosing Between a 401(k) and an IRA

You can contribute to both a 401(k) and an IRA, and there are benefits to each. If your employer offers a 401(k) match, it's generally a good idea to contribute enough to get the full match. After that, you may want to consider contributing to an IRA, as it offers more investment options and avoids the administrative fees that some 401(k)s charge. Once you've maxed out your IRA contributions, you can go back to contributing to your 401(k).

If your employer doesn't offer a 401(k) match, it's generally recommended to start with contributing to an IRA, as it offers more investment flexibility. After maxing out your IRA, you can then contribute to a 401(k) to take advantage of the tax benefits. Remember that contribution limits apply to the total of your contributions to all retirement accounts, so be sure to stay within the allowed limits.

Frequently asked questions