Intro
Whether you just inherited a large sum of money, won the lottery, or have been continuously putting aside money into your bank account, you might be sitting on some cash and you are unsure what to do with it.
There is no one-size fits all solution that is going to make sense for everyone out there. The decision on what to do depends on your situation, your goals and your risk tolerance.
Your Goals
The most important factor when determining what you should be doing with your idle cash is what your goals are. I like to bucket goals into 3 distinct categories:
Short Term Goals – 2 Years or less
Medium Term Goals – 2-5 Years
Long Term Goals – 5+ Years
The reason this matters is because you want to make sure you aren’t putting your cash at risk if you need it sooner. For example, if you have an upcoming vacation, you wouldn’t want to invest that money in the stock market and have it potentially lose value. It is a better decision to keep the funds in cash, where it won’t be subject to volatility.
Once you establish what your goals are, here are some of the options you have available to you.
If you are unsure of what your goals are and need help figuring them out, schedule a free introductory conversation to help clear the fog!
High Yield Savings
If you are holding cash in a savings account at one of the major banks, there is a good chance that it is not earning as much in interest compared to a high yield savings account (HYSA).
They work very similarly to a regular savings account, with the main difference being the higher interest rate. Because these accounts are mainly offered by online banks, they will pay yields several times higher than traditional brick-and-mortar banks since they have lower operating costs.
The nice thing about these types of savings accounts is that your money is available to you whenever you need it. There is no contract to lock up your funds for any period of time, so if you wanted to transfer the money out after one month, you are able to do so.
While these accounts are typically offered by online banks rather than physical branches, many still provide ways to access your money electronically or through linked accounts, though immediate cash access may be less convenient than a traditional bank.
Certificate of Deposit (CD)
CD’s are another cash investment which is generally considered lower risk. With a CD, you are agreeing to lock up your funds for a set period of time, and at the end of the period, you get your money back plus any interest earned.
CD’s can be purchased in periods that range from a few months to a few years. Because you are committing to a period of time, there is a penalty if you do need to withdraw the funds earlier than the maturity date. The penalty is dependent on how long the CD is for, and often consists of several months of interest, which in some cases can offset most or all of the interest earned if you withdraw early.
A CD is a great option if you know when you will need your cash by, and are comfortable with not being able to access those funds for the contract period.
Money Market Fund
These function very similarly to a high yield savings account in that they are pretty liquid and you can usually access the cash within 1 or 2 business days if you need it.
Money market funds are usually made available in investment accounts as opposed to operating like a bank account. In the same way you might buy an S&P 500 fund, you transact with a money market fund.
These funds typically invest in very short-term government securities or high-quality debt, which helps keep their value relatively stable. However, unlike bank savings accounts, they are generally not FDIC insured.
FDIC Insurance
The Federal Deposit Insurance Corporation is a government agency which insures the money in your bank account. FDIC insurance protects up to $250,000 per depositor, per insured bank, per ownership category. For joint account owners, that insurance amount increases to $500,000.
A common strategy for those with large sums of cash above the FDIC limit is to have multiple bank accounts at different institutions. That means they might have $250K at Wells Fargo, and another $250K at JP Morgan Chase.
Once you’ve established a foundation of safe and accessible cash, you may also consider options that introduce more risk in exchange for the potential for higher returns.
Additional Investment Options
Investing in the Market
For those who may have a longer term goal for their idle cash, investing in the market has historically provided higher long-term growth potential. With that said, because doing this is riskier than using any of the aforementioned strategies, it also comes with more downside risk.
You can choose to invest in either an individual company’s stock, or buy a fund which holds a basket of stocks. Buying an individual stock is generally seen as riskier and less diverse than buying a fund. Funds provide more diversity, and because of this, will generally come with a fee that can range from 0.01% to upwards of 1% and more.
Regardless of which type of investment you choose, there are many factors out of your control that can swing the value of your money up or down. Because of this volatility, investments in the stock market are typically more appropriate for money that will not be needed for several years.
Bonds
Bonds are another option to consider if you are looking to earn a return on your cash while taking on less risk than the stock market.
When you purchase a bond, you are essentially lending money to an entity in exchange for interest payments over a set period of time, with your principal returned at maturity.
Here are some of the main types of bonds:
- U.S. Government Bonds: Issued by the federal government and generally considered lower risk
- Municipal Bonds: Issued by state or local governments, often with tax advantages
- Corporate Bonds: Issued by companies and typically offer higher yields, but with more risk
For those focused on shorter-term goals, certain government bonds like Treasury Bills may be more appropriate due to their shorter time horizons.
One of the key considerations with bonds is that, while they are generally less volatile than stocks, they are still not completely risk-free, and can even have some volatility in value if you need to sell before maturity.
Bringing it All Together
It is highly dependent on what your goals are, but for those who have a lot of cash just sitting in a checking account or under their mattress at home, there are many options for how you can make the cash go to work for you.
Some of these will be on the safer end of the spectrum while other options will be riskier
If you would like to schedule a time to discuss your options for your specific situation, use the following link to schedule a free, introductory call!
Disclosure
This content is provided for informational and educational purposes only and should not be construed as personalized investment, tax, or legal advice. No advisory relationship is created by reading this article. Investment advisory & financial planning services are offered only pursuant to a written agreement through Noor Financial Services, a Registered Investment Adviser. Please consult with a qualified professional regarding your specific financial situation.
