What are you doing with cash now | Savings and Budget
Let’s face it: trying to figure out what to do with excess cash is a huge problem we have to face.
However, whether you have received a surprising amount of cash in the form of a work bonus, an inheritance or profits from the sale of a property, or if you are simply looking for a new savings strategy, doing so in this economy can be a particularly tricky business. Market conditions create a monetary dilemma: investing is risky and buying real estate is not an option for many due to supply issues. But leaving money liquid can also have major downsides due to today’s high inflation rates.
At current rates, cash has lost more than 8% of its value since last year, and the average savings account return of 0.06%, according to Bankrate, doesn’t do much to make up for it.
“You automatically take a risk by leaving the money with cash,” says Michael Taney, senior managing director at Magnus Financial Group LLC. “Cash is more volatile than people realize, because they don’t see the number moving up and down in their bank accounts.”
Your first step should, of course, be to make sure your financial fundamentals are covered. That means having an emergency fund with three to six months of savings, getting rid of high-interest debt and making sure you’re on track to save at least 10% of your income for retirement (including your savings and any match with your employer). Experts say the money you need in the next year or two is still owned in a liquid savings account, where you can easily access it.
If you’re lucky enough to locate all of these funds, there are plenty of paths you can take with your extra cash, especially if you don’t need it in the near term. If you plan to use that cash in the next year or two, your best near-term strategy is probably to keep it liquid or in a high-yield savings account.
“There are a number of possibilities, and it will depend on whether you are looking more for liquidity or yield,” says Stephanie Jenkin, certified financial planner and founder of My Financial Planner in Brooklyn, New York.
Here are some options to consider, each with their own advantages and disadvantages:
Current inflation rates mean these US savings bonds pay 9.62% year-over-year for I-bonds purchased through November, at least for the first six months of their holding. After that, prices will be adjusted based on inflation.
Positives: Electronic bonds are a good way to hedge against inflation, and it is difficult to find a guaranteed return of 9.62% in other investments at the moment.
Negatives: You can only buy I bonds directly through Treasury (TreasuryDirect.Gov), and you are limited to $10,000 per person per year. You do not have access to the money at all for the first year after purchase. If you redeem it five years ago, you will lose the interest of the last six months.
Investment accounts with tax benefits
The best account for you depends on your financial situation:
- If You Don’t Reach Your Workplace 401(k) LimitAnd You can get up to $20,500 this year (plus an additional $6,500 if you’re over 50).
- If you have a child or grandchild that you want to help with education expenses, consider a 529 . plan. Contribution rules vary by state, but the money grows tax-free and can be used tax-free for qualified education expenses.
- If you have a health plan with high deductibles at work, you can set aside money in a health savings account to pay health-related expenses now or in the future.
Positives: Tax-free and tax-deferred accounts can lower your tax bill now and boost the benefits of compound growth in the future.
Negatives: If you need to use the funds for a reason other than the purpose of the account, you may owe taxes and fines.
Diversified brokerage account
For the money you don’t need for at least the next few years, a bear market provides an opportunity to buy investments at a discount from its recent highs.
“The whole idea of having liquidity is to take advantage of asset sales prices, be it the stock market, bond market or home prices,” says Brett Anderson, president of St Croix Advisors.
Positives: There is no limit to the amount of money you can keep in a brokerage account and there are no restrictions on when to make withdrawals or how this cash can be used.
Negatives: While diversifying your holdings by purchasing mutual funds across multiple asset classes can provide some protection against market volatility and these portfolios have historically made significant profits, investment returns are never guaranteed.