What’s one thing that a pool and liquidity (cash on hand) have in common?
You have to know how to handle both in order to be safe.
Pool: Water needs to be kept clean and safe and if you enter, you need to know how to swim.
If you don’t know how to keep the water safe or swim, you need help from professionals who can teach you how to make the most of your pool experience.
Keeping a lot of cash around is no different, especially with inflation as high as it is.
Just like the pool, having a bunch of cash around can be fun. It can be great to be able to quickly pay for a vacation or purchase a splurge without taking on expensive debt.
Cash can also help you in the event of an emergency which is why most financial advisors recommend keeping a sizeable amount of cash on hand- 3-6 months worth of expenses.
Taking good care of your cash and making it work for you is a very important part of growing wealth that lasts.
If you have cash on hand, you don’t have to take on costly debt (especially when interest rates are super high) in the event of an emergency. But you have to balance this with ensuring that your cash is earning interest, otherwise you’re losing money.
So where do you put cash to keep it safe?
(1) High-Yield Savings Account if you need it super liquid. I like to check out bankrate.com for rates. Money Market Funds also can be worth a look.
(2) Series I Bonds – These pay a base rate + an inflation rate component so they help hedge against rising rates. The interest rate on these adjusts every 6 months. Current interest rate (Aug 2022) is 9.62%.
You can withdraw the money after one year but if you withdraw it prior to 5 years, you lose the 3 previous months’ worth of interest payments.
(3) Low Volatility Dividend Paying ETFs – If you’re willing to risk your money a bit but want the potential for higher returns, there are several funds that pay dividends and seek out stocks with low volatility. These are market products and therefore subject to market fluctuations and have risk.
Other options include certificates of deposits (CD)s, Government Short-Term Bonds (these are less risky because they are backed by the Government) and Short-Term Corporate Bonds (more risky).
Keep in mind that bond markets fluctuate so it’s often best to buy bond funds (mutual funds or ETFs) vs. individual bonds. These funds are accessible via your usual online, independent trading platform. Morningstar has a good article on some of the best short-term bond funds as of July 2022.
For more information and other cash management ideas, check out Bankrate’s 8 Best Short-Term Investments (as of August 2022).
If you have questions about keeping your cash safe, meeting with an Accredited Financial Counselor (AFC) can be a great place to start. AFCs are different from other financial planners in that they focus more on building a solid financial foundation and less on wealth management. They are also generally less expensive to work with compared to other financial advisors.
If you’re looking at combining cash management practices with your current investment portfolio, a Certified Financial Planner (CFP) or Chartered Financial Consultant (ChFC) might be a better fit. These professionals look at all of your investments to determine that your asset allocation matches your risk tolerance and profile.
Are you taking advantage of any of these cash storage options or doing something different?
Message me and let me know where you are storing your cash now.