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Where to Stash Your Cash

Posted January 24, 2017

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Especially in uncertain times, it’s a good idea to hold some amount of your savings in cash. A good rule of thumb is to hold three to six months of necessary living expenses in cash or liquid funds generally called your “emergency reserves”. However, the majority of savers and investors may not be doing enough planning with this excess cash or may even be holding much more cash than needed. Is your cash sitting at your bank in your non-interest bearing checking or savings account? Is it in a money market account at your brokerage earning .01% (that’s 1 penny per $100)? In either case, that’s like stashing your cash under the mattress. Perhaps you feel the cash is safe there; you also may be thinking “I should do something with that cash to earn some interest or income!” To help you with the challenge of where to stash your excess cash, we’ve prepared a list of possibilities along with their pros and cons.

 

  1. Online Bank Savings Account

Pros:

  • No risk, 100% safe
  • FDIC insured (provided you choose a bank/account that is FDIC insured) up to $250,000 per unique registration.
  • Higher interest rate than what local banks offer
  • Accessible online

Cons:

  • Low returns, averaging about 1% annual return
  • Online access required to open account and for any contributions/withdrawals
  • Limited number of transactions allowed before a fee is assessed (example: six per month)

 

  1. CD Purchased at Local Bank or via Brokerage Account (Schwab, eTrade, TD Ameritrade, etc.)

Pros:

  • No risk, 100% safe as long as you don’t cash out early from your CD
  • FDIC insured if you choose an FDIC-insured bank
  • Maturities from three months to several years (although, given the rising interest rate environment, you may want to choose CDs with maturities of less than two years).
  • Could be used to build a “laddered” approach by buying CDs with different maturity dates to increase liquidity

Cons:

  • Returns are still low historically (average 0.5% to 1.5% for six-month to multi-year CDs).
  • Interest rate environment is likely to see increases into 2017
  • Interest penalties for early distribution

 

  1. Short Term Bond Fund (requires time horizon of at least one year or more)

Pros:

  • May earn higher returns than savings accounts and CDs (in the range of 0% – 2% annually)
  • Professionally managed
  • A bond fund contains hundreds of bonds which are sold/bought every day, providing diversification.
  • Fully liquid with 24 – 48 hours if needed with no penalties

Cons:

  • Not 100% safe
  • May lose principal
  • Higher cost in order to pay a manager of the bond fund
  • May need professional recommendation for what to buy/hold/sell adding to expense
  • Requires use of a brokerage account or bank (Schwab, eTrade, TD Ameritrade, etc.)

 

  1. Intermediate Term Bond Fund (requires a time horizon of at least two years or more)

Pros:

  • Higher yielding bonds produce higher coupon/interest payments in the 0% – 4% range annually.
  • As interest rates rise, managers of those bond funds are able to buy higher paying bonds for their funds.
  • Fully liquid
  • Diversified
  • No penalty for selling

Cons:

  • Not 100% safe
  • May lose principal
  • Higher cost of paying a manager to manage bond fund
  • May need professional recommendation for what to buy/hold/sell adding to expense
  • Requires use of a brokerage account or bank (Schwab, eTrade, TD Ameritrade, etc.)
  • Special Note: The downside can outweigh the benefits in the shorter term (less than two years) as we saw over the fourth quarter of 2016, when interest rate spikes caused a 2% to 3% loss in the value of intermediate bonds.

 

Note: If you are thinking you might want to put your cash into bonds or bond funds, you may want to seek out a financial advisor for guidance.

 

 

 

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