When discussing and learning about investing, often you hear about investing in the stock market – stocks, bonds, etc. You’re taught to invest early and often and you will benefit from years and years of compounding growth and passive income that will help you sustain your lifestyle during retirement. But let’s not forget that cash is a part of our overall allocation too. Cash supports our current and short term financial needs as well as provides us with protection and liquidity.
What if you are saving for a down payment on a home, a luxury vacation next year or for home renovations that you so desperately want to get started on? Or what about your emergency funds – who knows when you will need that? Should you invest that cash?
My rule of thumb is that if you need cash within the next 1-3 years, I would not recommend investing cash in the stock market. Historically, the stock market will go up over time but it is not a linear journey upward and there is volatility and bumps along the way. You do not want to be invested in that short window of time where the market is seeing significant volatility as you will be left with less money than you started with for that down payment or vacation you were saving for.
Instead of investing into the stock market, I would be looking at other cash alternatives or cash placeholders that could give you some growth potential but with minimal to no risk associated with them.
First and foremost, it is imperative that you have a savings account. I suggest having 1 checking account where all your income is deposited, your bills are paid out of and a little bit of a cushion for those one off big spender months. Then I suggest having 1 savings account. You can open up a savings account at any one of the banks that you currently bank with and they will offer you a small interest rate for holding your cash there.
A savings account has two purposes; savings for emergencies and savings for short term needs. For emergency funds, I recommend having anywhere between 3-6 months worth of monthly spending saved in a savings account for the inevitable costly surprises that come up in each of our lives. If you are a homeowner or have children, I like to see this number closer to 5-6 months.
Having a savings account will protect you from your own spending habits. Keeping it in a separate account and automating those savings to your savings account will remind yourself that those funds have a purpose and they are not meant to be spent right away.
This option will not provide you an attractive rate of return, but it is an important placeholder for your cash separate and apart from your checking account. Below are options for your savings account that actually offer a more attractive interest rate than what your bank provides.
High Yield Savings Accounts are not going to generate a significant amount of wealth nor are they going to serve as an alternative to long term investing. But what they will do is be a great option for your short term cash needs.
High yield savings accounts on average will offer 10 to 15 times the interest rate offered on your regular savings account at the bank. The funds are fully accessible, liquid and will generate more income to you than a typical bank savings account.
These accounts are incredibly easy to set up, they link to your existing savings account or you can set up automatic transfers with ease, there are no minimums or monthly fees and you can feel protected by the fact that they are FDIC insured up to $250,000.
Two examples of a high yield savings account are Marcus by Goldman and Ally Bank, both currently offering approximately 1.2-1.25% as of July 2022. There are quite a few out there – they all are very similar – do not waste much time trying to identify the “best one”. Choose one and move on!
For anyone who has cash that they are saving for a specific purpose over the next few years, or those of you who are not interested in investing more at this time, or are simply looking to earn more interest but not take on a lot of risk…These savings bonds are a great option for those who are willing to set aside cash for the next 12 months – 5 years.
Series I Savings bonds are offered by the US Treasury and are tied directly to inflation rates. So as inflation rises, so too will the interest associated with these bonds. With that said, we are in significantly high inflationary times right now.
Inflation recently accelerated to roughly 9.1% in June 2022, the largest increase in over 40 years. The positive spin to this, is that the Series I Savings bonds are currently offering 9.62% as of May 2022, up from 7.12% in November 2021.
These bonds are backed by the full faith of the US government and effectively hold no risk. You are required to hold onto them for a minimum of 12 months and if you liquidate them between 12 months – 5 years, you will forego the last 3 months of interest as a “penalty.” This bond and the rate it currently provides, will offer significantly more interest in that 12 month period than any other current short term cash alternative (like HYSA, CDs, Tbills, etc.).
I wrote a blog post specifically on how Series I Savings Bonds work and believe it would be worth your while to look over and determine if it’s something you are interested in over the next few years as a placeholder for some of your cash.
As noted above, with the current inflationary climate we are in, Series I Savings Bonds will out-earn any other short term cash alternative at the rates I see today, even with an early withdrawal. But Series I Savings bonds only allow you to save $10,000 per person, per year. With that said, if you are looking for larger cash alternative options you have the high yield savings account option or see the below.
Certificate of Deposits – CD’s
CDs or Certificate of Deposits are offered by your bank. The two high yield savings account banks noted above, Marcus by Goldman and Ally, also have CD offerings. They typically have terms that require you to hold your cash in the CD for X amount of time and at the end of that period, you will be promised X% rate of return and all of your principal back. Many of these will have a minimum associated with them and will charge a fee if you withdraw the funds prematurely. I suggest looking into penalty-free withdraw CD’s.
You are able to buy treasury bills at many financial institutions. You can purchase treasury bills at a bank, or through a broker, or directly online from the US Treasury website TreasuryDirect. T- bills are issued through an auction bidding process, which occurs weekly, and are offered in various time commitments (4 week, 26 week, 52 week – less than 1 year). If you purchase a T-bill, for you to receive your full principal and stated interest rate, you will be required to hold on to the Treasury bill for the pre-determined amount of time identified when you purchased it. These T-Bills are essentially risk free as they are backed by the US Government and are liquid cash alternatives in that you can get access to it when needed.
As of July 21, 2022, the 52 week Treasury Bill interest rate is offering approximately 3%.
…they absolutely serve a purpose. If by a few clicks I am able to earn a bit more on the cash I know will be sitting there in my account for an extended period of time and will be paying for financial needs and goals I have lined up for the next 3 years….you better believe I am looking for ways to earn more than .1% and I hope you take advantage of your options too!
These options aren’t wealth creators but they are smart financial moves to earn additional income for simply doing…nothing.
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