Three Ways to Invest Your Cash
posted on Wed, Nov 15, 2017
One of the most frequent questions I get is how should I invest my cash or savings. Money outside of your retirement plans. Most people will throw all their savings into a zero-interest bearing account and never look back. It is understandable that we don’t want to subject our hard-earned savings to a lot of risk, but I believe there are ways to keep it safe and make it work for us at the same time. Here is how I break down the various levels of saving:
- Emergency Fund – This is the cash you will tap into if something unexpected happens. It is money you will want on hand if your car breaks down, the roof starts leaking or the water heater stops working. A good rule of thumb is to have about 3 months of living expenses available for use. If you are a homeowner an effective way to cover this emergency fund is to take out a line of credit on your house. It is cheap to maintain and most likely you will never need to use it. Just make sure you are not tempted to tap into it for non-emergencies like a trip to Hawaii or a new couch. If you do not own a home or don’t have the equity available for a line of credit, cash will do the trick. My suggestion would be to find a high interest-bearing savings account. A website like nerdwallet will help in this search. As of the posting of this blog you should be able to find something in the 1.30% range.
- Mid-Range Cash – After you have your emergency savings set up, I suggest having another 3 months of savings available to help cover an extended leave from work, or larger types of emergencies. For this bucket of money, you can be slightly more aggressive than the emergency fund as the likelihood of you needing it is less. If you are in a low tax bracket you can explore a low-risk bond ETF or mutual fund. I would start with something like iShares Core US Aggregate Bond ETF (AGG) or Vanguard Total Bond Market ETF (BND). If you are in a higher income tax bracket and want tax free earnings, consider a municipal bond fund in the state you reside. The year to year return on these types of investments is not guaranteed, but the volatility and risk is on the low end of the spectrum. Any losses incurred shouldn’t derail you savings plan too much. I would highly suggest contacting a financial advisor before purchasing, just so you understand all the risks involved.
- Longer Range Cash – This is cash for a rainy day or to help you sleep better at night. You most likely wouldn’t need it for 2 plus years down the road. My suggestion for this level of cash would be a conservative allocation fund. Something like Vanguard Wellesley Income (VWINX) has low fees and a good long-term track record of consistent returns with a low level of risk. As in the funds suggested for the mid-range cash, I would strongly suggest doing your research and/or contacting a financial advisor before purchasing.
There are a lot more ways to keep your cash safe and have it work for you. This blog should you get going.
Please feel free to contact me anytime to discuss this topic or any other in more detail.