Just like the “Got Milk?” campaign got people thinking about dairy products, it's time to think about the best places for your cash.
After years of zero to low interest rates on cash, we now have pretty good yields, north of 4%. I'll give you some suggestions to make sure your cash is working for you, but first, you need to put your cash into one of three buckets.
- Cash you may need in the next year or so (Short-Term)
- Cash you may need in the next few years (Mid-Term)
- Cash that you won’t need for 5+ years! (Long-Term)
Cash for the Short-Term
- Do you have a rainy-day emergency fund set up? It’s always a good idea to have 6 to 9 months of living expenses available.
- Check your interest rate. The yield on bank savings or checking accounts are frequently not very attractive. As a comparison, Schwab’s current money market rate is about 4.3% (as of 1/6/23, subject to change).
- Do you have credit card or other high interest rate debt? Start with the highest rate balance first and make a plan to pay down this debt as quickly as possible.
After you have your short-term cash working, think mid-term. This is cash that can be set aside for spending on major items in the next 2 to 5 years, such as college tuition or a down payment on a condo.
Cash for the Mid-Term
- Stay conservative, with money market funds or bank CDs. Try to match your investments with your time horizon. If you anticipate buying a house in 3 years, a two to three year CD makes sense.
- If you have a tuition payment coming up in the next few years, a contribution to a 529 college savings plan still may make sense. A state tax deduction may be available, and there are conservative cash or short-term bond choices available.
Ok, what’s the next step for that cash you are holding that you truly will not need for years? Think long-term.
Cash for the Long-Term
- Invest in your 401(k) – make sure you are maxing out your 401(k) or retirement plan at work.
- Invest in a Roth IRA if you are eligible.
- Invest in a non-retirement account. Set up a plan to “dollar cost average” cash into the markets, based on a mix of stocks and bonds that is tailored to your risk tolerance and time horizon. I often have clients invest long-term cash in equal amounts over 12 – 18 months.
- Invest in Yourself – do you have something on your “bucket list”? Something special that ties into your values? Remember, investing in yourself by spending on continuing education, health and wellness offers great returns!
I hope these ideas will help you Maximize Your Return on Cash.
Shari Greco Reiches
Shari co-founded Rappaport Reiches Capital Management with one goal - to maximize the return on life for her clients. Please connect with Shari below. She loves to talk about investing, financial planning, and Barry Manilow.