Investing Cash: Strategies For Maximizing Your Money's Potential

If you're looking to invest your cash, there are several options available to you. The best option for you will depend on your particular risk tolerance and financial goals.

Some of the most common investments include:

- Stocks: individual shares of companies that you believe will increase in value.

- Bonds: fixed-income investments that allow a company or government to borrow money.

- Mutual funds: funds that allow you to purchase many stocks, bonds, or other investments all at once.

- Index funds: funds that track a particular index, such as the S&P 500.

- Exchange-traded funds (ETFs): funds that can be traded on an exchange like a stock, and that often track an index.

- Certificates of deposit (CDs): promissory notes issued by banks, usually with a maturity of five years or less.

- Money market accounts: bank deposits that usually pay a higher interest rate than regular savings accounts.

- Robo-advisors: automated investment platforms that use computer algorithms to build and manage a client's investment portfolio.

It's important to remember that investing carries a certain amount of risk, and there is always the potential to lose money. When deciding how to invest your cash, it's crucial to consider your financial goals, risk tolerance, and time horizon.

High-yield savings accounts

• LendingClub LevelUp Savings Account: This account has no monthly fees or minimum balance requirements and offers a free ATM card and no ATM fees.
• Newtek Bank Personal High Yield Savings: Earn one of the highest savings returns with no minimum deposit required.
• UFB Portfolio Savings: Competitive APY with no monthly fees or minimum deposit requirement.
• Synchrony Bank High Yield Savings: No monthly fees or minimum deposits. Access your money by ATM, wire transfer, or electronic transfer.
• Marcus by Goldman Sachs High-Yield Online Savings Account: No fees, no minimum deposit requirement, and easy mobile access.
• CIT Bank Platinum Savings: Competitive APY on a minimum balance of $5,000. No monthly service fees and a low minimum account opening deposit of $100.
• SoFi Checking and Savings: Earn a higher APY with direct deposit or by making manual deposits of at least $5,000 every 30 days. No monthly fee or minimum deposit requirement.
• Ally Bank Savings Account: No monthly fees or minimum balance/deposit requirements. Option to add a checking account with ATM access.
• Capital One 360 Performance Savings: Competitive APY, no monthly fees, and no minimum requirements. Option to add a checking account with ATM access.
• American Express High Yield Savings Account: Competitive APY, no monthly fees, and no minimum balance requirement. 24/7 customer service.

Money market accounts

MMAs offer account holders some of the key benefits of a savings account, along with features of a checking account, including:

• Interest: MMAs allow account owners to earn interest on their balances, usually at a higher rate than a traditional savings account. The interest rate is variable, meaning it fluctuates with market conditions.
• Debit cards: Some banks provide a debit card with the account, which can be used to make deposits, withdrawals, and transfers at ATMs.
• Check-writing: Clients may be able to write checks against their account balances.

Advantages of Money Market Accounts

• Higher interest rates: MMAs typically offer higher interest rates than regular savings accounts.
• Check-writing and debit card privileges: MMAs often come with limited check-writing privileges and provide a debit card for purchases and ATM access.
• Insurance protection: Accounts held at banks are insured by the Federal Deposit Insurance Corporation (FDIC) up to $250,000 per depositor per bank. Accounts held at credit unions are insured by the National Credit Union Administration (NCUA). Joint accounts are insured for $500,000.

Disadvantages of Money Market Accounts

• Limited transactions: There may be restrictions on the number of transactions that can be executed each month, including withdrawals, certain transfers, and other debits.
• Fees: MMAs may have balance fees if the account falls below a minimum amount, as well as excess withdrawal fees.
• Minimum balance requirements: Banks often require a minimum initial deposit and may impose monthly fees if the balance falls below a certain threshold.

When to Choose a Money Market Account

Short-term corporate bond funds

When considering short-term corporate bond funds, it is important to pay attention to the expense ratio or fee. A lower expense ratio will result in higher returns for investors. Additionally, while these funds are considered safe, they are not insured by the government, so there is a possibility of losing money.

• SPDR Portfolio Short-Term Corporate Bond ETF (SPSB)
• IShares 1-5 Year Investment Grade Corporate Bond ETF (IGSB)
• Schwab 1-5 Year Corporate Bond ETF (SCHJ)
• Vanguard Short-Term Bond ETF (BSV)
• Fidelity Short-Term Bond Fund (FSHBX)

No-penalty certificates of deposit

No-penalty CDs are a good option for those who are unsure when they will need access to their money but still want to earn a higher annual percentage yield (APY) than that offered by a savings account. They also provide the flexibility to withdraw your money and place it in a higher-yield CD if interest rates rise.

• America First Credit Union: 4.30% APY, $500 minimum deposit
• Ally Bank: 4.00% APY, $0 minimum deposit
• Marcus by Goldman Sachs: 4.00% APY, $500 minimum deposit, with the option of three different term lengths
• Bank of America: 3.75% APY, $1,000 minimum deposit
• CIT Bank: 3.50% APY, $1,000 minimum deposit
• USAlliance Federal Credit Union: 4.80% APY, $500 minimum deposit
• Colorado Federal Savings Bank: 3.50% APY, $5,000 minimum deposit

No-penalty CDs are a safe option, as they are insured by the Federal Deposit Insurance Corporation (FDIC) at banks and the National Credit Union Administration (NCUA) at credit unions. They are a good choice for those who want to build savings but may need to make withdrawals to cover unexpected expenses. However, it is important to note that partial withdrawals are generally not permitted with no-penalty CDs, and you may need to withdraw your entire balance. Additionally, no-penalty CDs typically have lower APYs than standard CDs, and longer-term lengths may result in higher rates.

Mutual funds

Types of Mutual Funds

There are several types of mutual funds, including:

• Stock funds: These funds invest principally in equity or stocks and may be categorized by the size of the companies they invest in (small-, mid-, or large-cap) or their investment approach (aggressive growth, income-oriented, or value).
• Money market funds: These funds focus on short-term, low-risk investments, such as government bonds, and aim to provide stable returns with minimal investment risk.
• Bond funds: These funds invest in a range of bonds, providing a more stable rate of return than stock funds.
• Index funds: These funds aim to replicate the performance of a specific market index, such as the S&P 500, by holding the same proportion of assets.
• Target-date funds: These funds automatically adjust their asset allocation to become more conservative as they approach a specific target date, often used for retirement savings.

Advantages of Mutual Funds

• Diversification: Mutual funds provide instant diversification by allowing you to invest in a variety of assets within a single fund. This helps to reduce risk compared to investing in individual stocks or bonds.
• Professional management: Mutual funds are managed by professional investment managers who conduct research and make skillful trading decisions. This provides small investors with access to full-time money managers at a relatively low cost.
• Economies of scale: Mutual funds pool money from multiple investors, allowing them to benefit from economies of scale. This enables investors to take advantage of dollar-cost averaging and lower transaction costs.
• Variety of offerings: Mutual funds offer a wide range of investment options, allowing investors to choose funds that match their goals, risk tolerance, and investment objectives.
• Accessibility: Mutual funds have minimal investment requirements, making them accessible to a broad range of investors.

Disadvantages of Mutual Funds

Despite their benefits, mutual funds also have some drawbacks:

• Fees and expenses: Mutual funds charge various fees, such as expense ratios, sales charges (loads), redemption fees, and account fees. These fees can significantly impact your overall returns, especially over time.
• Liquidity: While mutual funds are generally highly liquid, they can only be redeemed at the end of the trading day, unlike stocks or ETFs that can be traded throughout the day.
• Performance risk: There is always the possibility that the value of your mutual fund will depreciate, and past performance does not guarantee future results.
• Cash drag: Mutual funds typically hold a significant portion of their portfolios in cash to accommodate share redemptions, which earns no return and can impact overall fund performance.
• Tax implications: Selling a mutual fund may trigger capital gains taxes, and there may be tax implications for any distributions or dividends received.

How to Invest in Mutual Funds

If you're considering investing in mutual funds, here are some steps to follow:

• Decide between active and passive funds: Active funds are managed by professionals who aim to beat the market, while passive funds aim to mimic the market's performance, often with lower fees.
• Calculate your investing budget: Determine how much money you have to invest comfortably, considering the minimum investment requirements of different funds.
• Choose a brokerage account: You can buy mutual funds through an online brokerage, directly from the fund company, or with the help of a financial advisor. Consider factors such as affordability, fund choices, research tools, and ease of use.
• Understand mutual fund fees: Be sure to research the expense ratios and any other fees associated with the funds you're considering, as these can impact your returns over time.
• Manage your portfolio: Once you've invested in mutual funds, remember to rebalance your portfolio periodically to maintain your desired asset allocation. Avoid chasing short-term performance and stick to your long-term investment plan.

Frequently asked questions