Let’s face it: trying to figure out what to do with excess cash is a big deal.
Still, whether you just received a sudden windfall of cash in the form of a job bonus, an inheritance, or the proceeds from a property sale, or you’re simply looking for a new savings strategy, doing so in this economy can be particularly difficult. Market conditions are creating a cash dilemma: Investing is risky and buying real estate is not an option for many due to supply issues. But leaving liquid money can also have significant downsides given 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 yield of 0.06%, according to Bankrate, is doing little to offset that.
“You’re automatically taking a risk by leaving the cash behind,” says Michael Tanney, senior managing director of Magnus Financial Group LLC. “Cash is a lot more volatile than people think because they don’t see the number going up and down in their bank account.”
Your first step, of course, should be to make sure you have your financial basics covered. That means having an emergency fund of savings for three to six months, eliminating 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 employer contributions). ). Experts say the money you need in the next year or two still belongs in a liquid savings account, where you can easily access it.
If you’re lucky enough to have all those boxes checked, there are plenty of avenues you can take with your extra money, especially if you don’t need it anytime soon. If you plan to use this cash in the next year or two, keeping it liquid or in a high-yield savings account is probably the best short-term strategy.
“There are several possibilities, and it will depend on whether you’re looking for more liquidity or yield,” says Stephanie Genkin, a certified financial planner and founder of My Financial Planner in Brooklyn, New York.
Here are some options to consider, each with their pros and cons:
Current inflation rates mean that these US savings bonds are paying 9.62% per year for I bonds purchased through November, at least for the first six months they are held. After that, rates will be adjusted for inflation.
Advantage: I bonds are a good hedge against inflation, and a guaranteed 9.62% return on other investments is hard to find right now.
Cons: You can only buy I Bonds directly through the Treasury (TreasuryDirect.Gov), and you are limited to $10,000 per individual per year. You cannot access the money at all for the first year after purchase. If you redeem before the five years are up, you will lose the most recent three months’ interest.
Tax-advantaged investment accounts
The best account for you depends on your financial situation:
- If you’re not maxing out your workplace 401(k), You can save up to $20,500 this year (plus an additional $6,500 if you’re over 50).
- If you have a child or grandchild who 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 educational expenses.
- If you have a high-deductible health plan at work, you can set aside money in a health savings account to pay for health-related expenses now or in the future.
Advantage: Tax-exempt and tax-deferred accounts can lower your tax bill now and further increase the benefits of compound growth in the future.
Cons: If you need to use the funds for a reason other than the purpose of the account, you may owe taxes and penalties.
Diversified brokerage account
For money you don’t need for at least the next few years, a falling market provides an opportunity to buy investments at a price discounted from their recent highs.
“The general idea of having liquidity is to take advantage of the selling prices of assets, whether it’s in the stock market, the bond market or house prices,” says Brett Anderson, president of St. Croix Advisors.
Advantage: There is no limit to the amount of money you can have in a brokerage account and there are no restrictions on when you can make withdrawals or how you can use that cash.
Cons: While diversifying your holdings by purchasing mutual funds across multiple asset classes may provide some protection against market volatility, and such portfolios have historically generated significant returns, investment returns are never guaranteed.