Let’s face it: Trying to figure out what to do with excess cash is a big problem to have.
Yet whether you’ve received a sudden financial windfall in the form of a work bonus, inheritance, or profits from a home sale, or are simply looking for a new savings strategy, doing it in this economy can be particularly tricky. Market conditions create a cash conundrum: investing is risky and buying property is not an option for many due to supply issues. But leaving cash can also have significant downsides due to today’s high inflation rates.
“You automatically take a risk by leaving cash,” says Michael Tanney, senior managing director of Magnus Financial Group LLC. “Money is much more volatile than people think because they don’t see the amount going up and down in their bank account.”
Your first move, of course, should be to make sure your financial bases are covered. That means having an emergency fund with three to six months of savings, eliminating high-interest debt, and making sure you’re on track to save at least 10% of your income for retirement (including including your savings and any employer consideration). Experts say the money you need in a year or two still belongs in a liquid savings account, where you can access it easily.
If you’re lucky enough to have all of these boxes checked, there are many avenues you can take with your extra cash, especially if you don’t need it in the short term. If you plan to use that money over the next two years, keeping it liquid or in a high-yield savings account is probably the best short-term strategy.
“There are a number of possibilities, and it will depend on whether you’re looking more for liquidity or yield,” says Stephanie Genkin, certified financial planner and founder of My Financial Planner in Brooklyn, New York.
Here are a few options to consider, each with their own pros and cons:
Current inflation rates mean that these US savings bonds are paying 9.62% on an annual basis for I bonds purchased through November, at least for the first six months of their holding. After that, rates will adjust with inflation.
Advantages: I-bonds are a good hedge against inflation, and it’s hard to find a guaranteed return of 9.62% in other investments these days.
The inconvenients: You can only buy I-bonds directly through Treasury (TreasuryDirect.Gov), and you’re limited to $10,000 per person per year. You cannot access the money at all for the first year after purchase. If you redeem them before five years, you will lose the last six months of interest.
Tax-advantaged investment accounts
The best account for you depends on your financial situation:
- If You’re Not Maximizing 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 you want to help pay for their education costs, consider a 529 plan.. Contribution rules vary from state to state, but the money grows tax-free and can be used tax-free for eligible educational expenses.
- If you have a high-deductible health plan at work, you can set aside money in a health savings account pay for health-related expenses now or in the future.
Advantages: Tax-exempt and tax-deferred accounts can both reduce your tax bill now and further increase the benefits of compound growth in the future.
The inconvenients: If you need to use the funds for a reason other than the purpose of the account, you may have to pay taxes and penalties.
Diversified Brokerage Account
For money you won’t need for at least the next few years, a bear market offers the opportunity to buy investments at a discount from their recent highs.
“The whole idea of having liquidity is to take advantage of the sale prices of assets, whether in the stock market, the bond market or real estate prices,” says Brett Anderson, president of St. Croix Advisors. .
Advantages: There are no limits to the amount of money you can hold in a brokerage account and no restrictions on when you can make withdrawals or how you can use that money.
The inconvenients: Although diversifying your holdings by buying mutual funds across multiple asset classes can provide some protection against market volatility and these portfolios have historically generated significant gains, investment returns are never guaranteed.