Best place to store cash?
If you do not already have an emergency fund setup, you are putting yourself at a real risk of being homeless. The top 3 reasons causing homelessness can be attributed to 1) loss of job, 2) housing, and/or 3) drug or alcohol abuse. Two of those three reasons can be mitigated by building an emergency cash fund (giving you access to emergency housing or paying those bills when you don’t have a job). It can mean a world of difference by stashing away this emergency fund. According to Investopia, the emergency fund should be equal to about 6 months of expenses. So if your monthly expenses (bills, rent, groceries etc) is $1,000; then you would need $6,000 in Emergency Fund.
Great! Now that we have cleared our the basics, the real question I wanted to address:
Where should I put the emergency cash? moreover, any additional cash.
Let’s go through each option:
- Hold cash and store it under the your pillow Truth be told (if not already), cash is a deflationary asset, by holding cash, not only are you not earning interest, you are actually losing money as the spending power drops (because cost of goods increase over time). Hold only what you really need to use on a weekly basis in cash. Maybe only the $2 bills that look pretty and have no real use.
- Traditional Checking or Savings Account Accounts in Chase, Wells Fargo, Bank of America is commonly where most people send their paycheck. Unfortunately the interest in these accounts are super low. How low? 0.01% to 0.25%. Again, try not to leave your cash here.
3. High Interest Savings Accounts (HISAs) Okay this is where I get excited to share with you how you can change your financial future, potentially cut years off your savings or retirement goals. HISAs offers on average x20 the national average interest rate. Some of these accounts offer features just like your traditional checking accounts (like bill pay, check writing, online banking, debit card etc). The only difference is it’s BETTER and NEWER. Some examples of this includes Ally, Credit Karma Savings, SoFi’s Money Account, Marcus by Goldman etc.
If there was one take away from reading this, move all cash you do not need sitting as cash or in a traditional account to HISAs. Compounding interest will help you grow your money a lot faster this way.
4. Cash Deposits (CDs) / Bonds For those who really want to stash away cash and not limit your access to it. Consider buying a CD or bond. They are term based (which means the locked up for a specified period of time). You will get weekly coupon or interest payment monthly and lump sum at the end of the year. Bonds and CDs generally pay a little more than HISAs. You can buy bonds from corporations, governments, and other institutions. It’s basically an I owe you document. If you know you are an impulse buyer, this is a good option to lock up your savings. Note there are fees on Bond purchases. More on CDs/Bonds
5. Bond ETFs This is a newer kind of financial product. I’ve recently discovered this is a better option for me. ETFs are exchanged traded funds (or a basket of financial stocks, bonds, fund etc). They are managed by a financial corporation. By buying a unit of an ETF, you are buying a % holding of a basket of holdings of different things within the ETF. A Bond ETFs is a index tracking a basket of different bonds. For example: The Vanguard Total Bond Market ETF BND tracks all bonds in the US market (this includes government and corporation bonds). In comparison, the ISHARES National Muni Bond ETF MUB tracks all government municipal bonds. Bond ETFs are preferred over CDs and HISA for two reasons: 1) They provide higher returns in than HISAs in the form of a dividend (or coupon) payment plus the potential gains from the movement of the bond price. 2) It provides you liquidity or the ability to sell it on the free market quickly to take your money back.
Note: Bonds and Bond ETFs market price is inversely related to the interest rate. When interest rates are expected to drop, the total value of the bond increases. In contrast, when the feds raises interest rates, the value of the bonds decreases (as people sell their bonds to put money into higher returning assets) .
6. The Stock Market Okay, once you have put enough money in the emergency fund on the above options, then, only then should you consider playing with the stock market.
I passionately love talking about it finances and savings.
If you do too, please share with your friends.
Disclaimer: Opinions expressed here are author’s alone, not those of any bank, credit card issuer, airlines or hotel chain, or other advertiser and have not been reviewed, approved or otherwise endorsed by any of these entities. This is not financial advice and solely for educational purposes.