Physical Cash Investment: Strategies For Smart Money Allocation

Investing physical cash is a relatively stable, low-risk way to earn a higher return than cash would on its own. Cash investments can include bank products such as savings accounts, or investments such as short-term CDs or fixed-income bills or notes. Cash investments can help investors mitigate the risk of inflation, which erodes the value of physical cash over time. Cash investments can also provide liquidity, allowing investors to quickly access their funds. However, cash investments may not always keep up with inflation and typically offer lower returns compared to other types of investments.

Savings accounts

Liquidity and Flexibility

Insurance

Interest Rates

The interest rates offered by savings accounts can vary across different banks. Higher interest rates mean higher yields on your savings. It's important to regularly check the rates offered by your bank and compare them with other options to ensure you're getting a competitive rate.

Sensitivity to Rate Cuts

The yields on savings accounts are sensitive to interest rate cuts. When the Federal Reserve cuts interest rates, the yields on savings accounts are likely to dip. Therefore, it's essential to keep an eye on the Fed's monetary policy decisions.

Types of Savings Accounts

There are different types of savings accounts to consider, such as instant or easy-access accounts, fixed-rate accounts, and taxable savings accounts. Instant or easy-access accounts are suitable for emergency funds but may not offer much growth above inflation. Fixed-rate accounts typically offer higher interest rates, but you need to keep the money in the account for a specified period. Taxable savings accounts allow you to place your money after you've used up your tax-free allowance in other accounts.

Building an Emergency Fund

It is generally recommended to have an emergency fund equivalent to three to eight months' worth of living expenses. This fund should be easily accessible, making savings accounts a good option for this purpose.

Money market funds

There are three types of money market funds: government money market funds, municipal money market funds, and prime money market funds. Each type has a slightly different investment profile and tax treatment.

Government money market funds invest at least 99.5% of their money in highly liquid, government-backed assets such as cash, short-term US government debt, and repurchase agreements backed by government debt. Income from these funds is subject to federal income tax unless it is held in a tax-advantaged account.

Municipal money market funds, also known as tax-free money market funds, invest in short-term municipal debt. The income generated by these funds is exempt from federal income taxes, and some states also exempt their municipal bonds from state income taxes.

Prime money market funds invest in short-term corporate debt rather than government debt. The income generated by these funds is fully taxable unless it is held in a tax-advantaged account.

Real estate

There are several ways to invest physical cash in real estate, each with its own pros and cons. Here are some of the most common methods:

Real Estate Investment Trusts (REITs)

REITs are companies that own and operate income-producing real estate, such as malls, office buildings, or apartment buildings. They are traded on major exchanges like stocks and provide investors with exposure to the real estate market without the need to own physical properties. REITs are highly liquid and offer relatively high dividends, making them a common investment choice. They are also suitable for investors with limited funds as they can be purchased for as little as $1,000.

• Crowdfunding and Online Platforms
• Rental Properties

Investing in rental properties can provide a steady income stream through rent collection. This method requires a significant upfront investment, often $100,000 or more, to purchase and maintain the property. It also demands ongoing management, including finding and dealing with tenants, maintenance, and repairs.

Flipping Properties

"Flipping" involves buying undervalued properties, renovating them, and then selling them for a profit. This strategy can be lucrative but is also risky and time-consuming. It requires a good understanding of the real estate market and renovation costs. Flippers often need to hold multiple properties at once, which can be costly.

Real Estate Investment Groups (REIGs)

REIGs are similar to small mutual funds for rental properties. Investors can buy one or more units within an apartment or condo building through an operating company, which then manages the properties and takes a percentage of the rent. REIGs offer a more hands-off approach to real estate investing, but they may charge high fees.

Direct Property Ownership

One of the most traditional ways to invest in real estate is to purchase a property outright, such as a home or investment property. This method can provide long-term appreciation and potential rental income. However, it requires a substantial upfront investment and ongoing maintenance and management.

Each of these methods offers a different approach to investing physical cash in real estate, and individuals should consider their financial situation, risk tolerance, and investment goals when deciding which strategy is most suitable for them.

Precious metals

Gold is the most common precious metal for investment due to its durability, malleability, and ability to conduct heat and electricity. It is also highly coveted as a status symbol and is often used in jewellery. The price of gold depends on its availability, investor sentiment about inflation, and current interest rates and monetary policies.

Silver is also a common investment choice and has similar properties to gold, making it useful in industrial applications. Silver is used in everything from batteries and appliances to solar panels and medicine. Its price is dictated by the market and is more volatile than gold due to its dual role as an industrial metal and store of value.

Platinum is rarer than gold and has a smaller market, making its price more volatile. It is used in automotive catalytic converters, jewellery, and the computer and petroleum industries.

Palladium is another precious metal with important industrial uses, including electronics, dentistry, medicine, and groundwater treatment. While it received media attention during the pandemic, it is not as well-known as other precious metals but still has investment potential.

• Bullion: You can purchase physical gold, silver, platinum, or palladium in the form of coins, rounds, bars, or ingots. This option provides a tangible asset that can be bought from local currency exchanges or reputable online dealers. However, storing large amounts of bullion at home may be unsafe, and professional storage incurs additional costs.
• Mining company stocks and mutual funds: You can invest in mining companies and mutual funds, but be aware that their performance may be influenced more by market pressures than the underlying metal's price.
• Exchange-traded funds (ETFs): ETFs are a popular way to invest in precious metals, offering instant diversification. Some ETFs hold physical metals, while others hold shares of mining companies or a combination of both.
• Individual retirement accounts (IRAs): Precious metals can be used to fund your retirement through various IRAs. They are a stable, long-term investment option that can help hedge against inflation.

When investing in precious metals, it is important to consider the benefits and drawbacks. Precious metals tend to hold their value well due to their scarcity, and they are easily purchasable and relatively stable. They also provide portfolio diversification and are a hedge against inflation. However, they do not generate income, and there may be costs associated with storage, insurance, and transaction fees. Additionally, their prices can be volatile due to various economic, political, and market factors.

Overall, precious metals can be a valuable part of a well-diversified portfolio, offering stability and a hedge against economic uncertainty.

Premium bonds

Each £1 bond comes with a unique bond number. The more bonds you buy, the more your chances of winning improve. You can keep buying bonds until you reach the maximum holding level of £50,000. You can buy premium bonds for yourself or on behalf of your child, grandchild, or great-grandchild.

You can buy premium bonds directly from NS&I by registering on their website or over the phone. The minimum purchase amount is £25 for one-off purchases and monthly standing orders. You must hold premium bonds for a full month before they are eligible to win.

Frequently asked questions